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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission file number 0-24568
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INNKEEPERS USA TRUST
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(Exact name of registrant as specified in its charter)
Maryland 65-0503831
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
306 Royal Poinciana Way, Palm Beach, Florida 33480
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (561) 835-1800
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
Title of each class on which registered
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SERIES A PREFERRED SHARES, New York Stock Exchange
par value of $.01 per share -----------------------
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON SHARES, par value of $.01 per share
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The number of shares outstanding of the registrant's only class of common
shares, $.01 par value per share, as of March 10, 1999, was 34,676,586. The
aggregate market value of the common shares held by nonaffiliates of the
registrant as of March 10, 1999 was approximately $370,000,000.
Documents Incorporated by Reference
Portions of the 1998 Innkeepers USA Trust Annual Report to Shareholders to
be filed with the Securities and Exchange Commission are incorporated by
reference into Parts I and II hereof. Portions of the 1999 Innkeepers USA Trust
Proxy Statement to be filed with the Securities and Exchange Commission within
120 days after the year covered by this Form 10-K with respect to the Annual
Meeting of Shareholders to be held on May 5, 1999 are incorporated by reference
into Part III hereof.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM NO.
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PART I
<S> <C>
Item 1. Business...................................................................................... 1
Item 2. Properties.....................................................................................24
Item 3. Legal Proceedings..............................................................................27
Item 4. Submission of Matters to a Vote of Security Holders ...........................................27
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters .......................................................................................27
Item 6. Selected Financial Data........................................................................27
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation...........................................................................28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....................................31
Item 8. Financial Statements and Supplementary Data....................................................31
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure...........................................................................46
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................46
Item 11. Executive Compensation.........................................................................46
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................46
Item 13. Certain Relationships and Related Transactions.................................................46
PART IV
Item 14. Exhibits, Financial Statements, Schedules
and Reports on Form 8-K........................................................................46
</TABLE>
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THIS REPORT CONTAINS AND INCORPORATES BY REFERENCE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
INCLUDING, WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS "BELIEVES,"
"ANTICIPATES," "EXPECTS" AND WORDS OF SIMILAR IMPORT. SUCH FORWARD-LOOKING
STATEMENTS RELATE TO FUTURE EVENTS AND THE FUTURE FINANCIAL PERFORMANCE OF THE
COMPANY, AND INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS
WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY
TO BE MATERIALLY DIFFERENT FROM THE RESULTS OR ACHIEVEMENTS EXPRESSED OR IMPLIED
BY SUCH FORWARD-LOOKING STATEMENTS. ATTENTION SHOULD BE PAID TO THE VARIOUS
FACTORS IDENTIFIED OR INCORPORATED BY REFERENCE IN THIS REPORT WHICH COULD CAUSE
ACTUAL RESULTS TO DIFFER, INCLUDING BUT NOT LIMITED TO THOSE DISCUSSED IN THE
SECTIONS ENTITLED "INTERNAL GROWTH STRATEGY," "ACQUISITION STRATEGY,"
"COMPETITION", "BUSINESS RISKS,""LEVERAGE," "ENVIRONMENTAL MATTERS," "TAX
STATUS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS." THE COMPANY IS NOT OBLIGATED TO UPDATE ANY SUCH FACTORS
OR TO REFLECT THE IMPACT OF ACTUAL FUTURE EVENTS OR DEVELOPMENTS ON SUCH
FORWARD-LOOKING STATEMENTS.
PART I
ITEM 1. BUSINESS
(a) GENERAL
OVERVIEW
Innkeepers USA Trust ("Innkeepers") is a self-administered real estate
investment trust ("REIT"), which commenced operations on September 30, 1994. At
December 31, 1998, Innkeepers owned interests in 63 hotels with an aggregate of
7,639 rooms (the "Hotels") through its 95.7% interest in Innkeepers USA Limited
Partnership (with its subsidiary partnerships, the "Partnership" and
collectively with Innkeepers, the "Company").
The Company has implemented a strategy of utilizing multiple lessees
and hotel management companies for its hotel properties. The Company leases 56
of the Hotels to Innkeepers Hospitality, Inc. (or other entities under common
ownership, collectively the "IH Lessee") and leases seven of the Hotels (the
"Summerfield Hotels") to affiliates of Patriot American Hospitality, Inc. (the
"Summerfield Lessee" and, together with the IH Lessee, the "Lessees") pursuant
to percentage leases (the "Percentage Leases"). Innkeepers Hospitality, Inc. was
formerly known as JF Hotel, Inc. The Percentage Leases allow the Company to
participate in increased revenue from the Hotels by providing for the payment of
rent based on percentages of room revenues. The IH Lessee has entered into
management contracts (the "Marriott Management Agreements") with Residence Inn
by Marriott, Inc., a subsidiary of Marriott International, Inc. ("Marriott"),
the largest operator of upscale extended-stay hotels in the United States, to
manage 23 of the Residence Inn Hotels and with another third-party manager to
manage two of the Hotels. The Summerfield Lessee has entered into management
contracts with affiliates of Wyndham International, Inc., whose shares are
paired and trade with the shares of Patriot
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American Hospitality, Inc. (Patriot and Wyndham are referred to collectively
herein as "Patriot"), to manage the seven Summerfield Hotels. Innkeepers
Hospitality, Inc. manages 31 of the 63 hotels.
UPSCALE EXTENDED-STAY SEGMENT
The Company's acquisition strategy focuses primarily on upscale
extended-stay hotels. Smith Travel Research ("Smith Travel") defines the upscale
extended-stay hotel segment as those extended-stay hotels having an average
daily rate ("ADR") of $85 or greater.
Upscale extended-stay hotels are distinguishable from mid-priced,
economy and budget extended-stay hotels generally as follows:
<TABLE>
<CAPTION>
EXTENDED-STAY HOTELS
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TYPICAL MID-PRICED, ECONOMY AND BUDGET TYPICAL UPSCALE
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Principal Customer Base. . . . . Independent business Corporations for executive
travelers; government training and consulting;
workers; families project assignment; corporate
relocations.
Services/Amenities . . . . . . . Minimal meeting space; Complimentary breakfast and
limited lobby space; limited evening cocktails; meeting
on-site food; limited front space; daily linen and room
desk hours; weekly maid cleaning service; 24-hour
service and twice-weekly front desk; guest grocery
linen service services; 24-hour security and
maintenance; on-site conve-
nience store
Physical Facilities. . . . . . . Smaller rooms; fewer kitchen Larger rooms; higher quality
amenities; limited facility construction; higher level of
amenities kitchen amenities; higher
level of room furnishings;
pool; exercise facilities
</TABLE>
Over the longer term, the Company believes that new supply will be limited in
its target markets by the relatively high barriers to entry in those markets.
High barriers to entry include scarcity and high cost of land, extensive permit
and approval requirements, the relatively long lead time required to develop an
upscale extended-stay hotel, particularly in the New England, Middle Atlantic
and Pacific coast states, and the relatively high costs associated with such
development.
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The upscale extended-stay hotel concept was developed by Jack P. DeBoer
and Rolf E. Ruhfus, Trustees of the Company, who co-founded both the Residence
Inn and Summerfield Suites brands. The Company believes that its relationships,
particularly with Marriott, have provided and will provide the Company with
attractive opportunities to acquire additional upscale extended-stay hotels.
RELATIONSHIPS
To implement a multi-lessee/operator strategy, the Company has formed
relationships with the owners and operators of two of the premier brands in the
upscale extended-stay segment, Marriott and Summerfield.
Marriott. The Company currently owns 44 Residence Inn hotels, including
26 that are managed by Marriott. Marriott's management of Company-owned Hotels
enables the Company to realize the benefits of Marriott's resources and hotel
operations experience and may enhance the Company's ability to grow. The Company
believes that its relationship with Marriott has and may, in the future, provide
the Company access to Residence Inn developers and potential sellers to which it
might not otherwise have meaningful access. The Company expects that Marriott
will manage certain additional Residence Inn by Marriott hotels (and possibly
other Marriott-brand hotels) that may be acquired in the future, although no
assurance can be given in this regard. Marriott currently owns 298,334 Common
or Preferred Units.
Summerfield. The Company currently owns seven Summerfield brand hotels
(including six Summerfield Suites hotels and one Sunrise Suites hotel), all of
which are leased and managed by Patriot. Mr. Ruhfus is a Director of Wyndham
International, Inc. and the non-executive Chairman of its all-suites division,
and he is also a Trustee of the Company. Certain of the sellers of the
Summerfield Hotels currently own 612,934 Common Units, which the Company issued
to them in connection with its acquisition of the Summerfield Hotels.
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THE HOTELS
The following charts set forth certain information with respect to the
Hotels at December 31, 1998:
<TABLE>
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Number of
Franchise Affiliation Number of Hotels Rooms/Suites
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Upscale Extended-Stay
Residence Inn 41 4,787
Summerfield Suites 6 759*
Sunrise Suites 1 96
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48 5,642
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Mid-Priced
Hampton Inn 12 1,527
Courtyard by Marriott 1 139
Comfort Inn 1 127
Holiday Inn Express 1 204
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15 1,997
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63 7,639
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</TABLE>
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* Includes 298 two-bedroom suites
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<TABLE>
<CAPTION>
Number Number of Percentage of
State of Hotels Suites/Rooms Suites/Rooms
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<S> <C> <C> <C>
California 11 1,622 21.3%
Washington 5 624 8.3
Florida 5 603 7.9
Texas 4 544 7.1
Michigan 4 404 5.3
Georgia 3 430 5.6
Illinois 3 368 4.8
Pennsylvania 3 357 4.7
New York 3 319 4.3
New Jersey 3 308 4.0
Maryland 2 308 4.0
Massachusetts 2 304 4.0
Colorado 2 284 3.7
Connecticut 2 192 2.5
Kentucky 2 176 2.3
Indiana 2 168 2.2
Minnesota 1 126 1.6
Oregon 1 112 1.5
North Carolina 1 88 1.2
Virginia 1 80 1.0
Ohio 1 80 1.0
Maine 1 78 1.0
Kansas 1 64 0.7
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63 7,639 100.0%
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</TABLE>
RECENT DEVELOPMENTS
On January 8, 1999, the Company purchased from Marriott two Residence
Inn by Marriott hotels located in Chicago (Rosemont), Illinois and Richmond,
Virginia with an aggregate of 296 rooms for a cash purchase price of
$31,268,000. The purchase price was funded through the Company's line of credit
and available cash.
On March 12, 1999, the Company purchased from Marriott a Residence Inn
by Marriott hotel located in Detroit (Livonia), Michigan for a cash purchase
price of approximately $10.2 million. The purchase price was funded through the
Company's line of credit and available cash.
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This was the last hotel to be purchased under a contract to acquire six
Residence Inn hotels from Marriott for an aggregate of approximately $89
million, which was announced in early 1998.
On February 26, 1999, the Company's Board of Trustees declared a first
quarter distribution of $0.28 per common share and $0.53906 per Series A
Preferred Share to shareholders of record on March 26, 1999. The distribution is
payable on April 27, 1999.
On March 1, 1999, the Company purchased a $100 million notional amount
interest rate cap, which effectively capped the interest rate on $100 million of
outstanding line of credit borrowings at 7.625% for one year.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company is in the business of acquiring equity interests in hotel
properties. See the Consolidated Financial Statements and notes thereto included
or incorporated by reference in Item 8 on this Form 10-K for certain financial
information required to be included in response to this Item 1.
(c) NARRATIVE DESCRIPTION OF BUSINESS
GENERAL
The Company is a self-administered Maryland real estate investment
trust which owned equity interests in the 63 Hotels with an aggregate of 7,639
rooms as of December 31, 1998. A wholly-owned subsidiary of Innkeepers owns an
approximate 95.7% interest in and is the sole general partner of Innkeepers USA
Limited Partnership. The Hotels are owned by Innkeepers USA Limited Partnership
directly or by various subsidiary partnerships.
INTERNAL GROWTH STRATEGY
The Percentage Leases are designed to allow the Company to participate
in growth in room revenue at the Hotels by providing for the payment of rent
based upon percentages of room revenues ("Percentage Rent"). Under the
Percentage Leases, once room revenues at a Hotel reach a specified level (a
"Revenue Break Point"), the Company receives between 68% and 70% of incremental
room revenues. Each Percentage Lease also provides for a fixed annual base rent
("Base Rent"). The Percentage Leases generally provide that annual Base Rent and
the Revenue Break Points for the payment of Percentage Rent will be adjusted
annually based on changes in the CPI.
For the year ended December 31, 1998, room revenues from each of the
Hotels exceeded the Revenue Break Point for the payment of the higher tier of
Percentage Rent under the applicable Percentage Lease. For the hotels leased by
the IH Lessee, the Company earned Percentage Rent in excess of Base Rent on all
of the hotels except the Hampton Inn hotel in Norcross, Georgia.
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For the hotels leased by the Summerfield Lessee, the Company earned Percentage
Rent in excess of Base Rent on all of the hotels except the Summerfield Suites
hotel in West Hollywood, California. The Summerfield Lessee agreed that for 1997
and 1998, the Base Rent payable for the six Summerfield Suites hotels and the
Sunrise Suites hotel would be an amount equal to the Percentage Rent that would
be payable under the formulas set forth in the applicable Percentage Leases if
those hotels achieved the room revenues budgeted for such periods. In 1999 and
subsequent years, Base Rent for these hotels will be reduced from the levels
applicable in 1997 and 1998, but the Percentage Rent formula will remain the
same (subject to certain adjustments based on increases in the CPI).
The Company seeks to increase Percentage Lease payments through the
following; (i) monitoring the Lessees' and operators' marketing programs, sales
management policies and operational initiatives at the Hotels, (ii) selective
renovation of the Hotels, (iii) the possible development of hotels on a selected
basis, and (iv) the re-branding and repositioning of existing hotels on a
selected basis.
Sales Management
The IH Lessee uses market-oriented sales management programs to
coordinate, direct and manage the sales activities of personnel located at each
Hotel it operates or oversees. Weekly sales reports are generated by each
salesperson through the daily input of data that identifies all sales related
activities which have taken place during the day (e.g., appointments, sales
calls, direct mailings, incoming calls) and the results of such actions (e.g.,
appointments made, literature sent, rooms reserved). Each salesperson also
inputs any comments made by prospective or existing customers, the potential for
new or continued business and the timing of the follow-up action required.
Additionally, sales reports permit management to promptly evaluate a
salesperson's productivity as measured by the quantity of sales calls, sales
call results and number of group bookings. These sales reports also allow
comparisons of the ongoing sales efforts at the applicable Hotel to the
marketing and business plan established for each Hotel and allow management to
adapt the marketing and business plan accordingly. The third-party managers,
including Marriott, use focused, well-developed sales management programs at the
Hotels operated by those managers. At December 31, 1998, the IH Lessee employed
four regional managers and four regional directors of sales to oversee sales and
marketing efforts. In addition, the IH Lessee employs asset managers to oversee
the relationships with the Summerfield Lessee and Marriott, including reviewing
sales efforts and results, operational initiatives and capital programs, as well
as physically inspecting the properties that they manage on a regular basis.
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Capital Improvements, Renovation and Refurbishment
The Percentage Leases require the Lessees to maintain the Hotels in a
condition that complies with their respective franchise licenses and the
Marriott Management Agreements, among other requirements. In addition, the
Company may upgrade the Hotels in order to capitalize on opportunities to
increase revenue, and as needed to meet competitive conditions and preserve
asset quality. The Company will renovate Hotels when the Company believes the
investment in renovations will provide an attractive return to the Company
through increased revenue under the Percentage Leases or is otherwise in the
best interests of the Company.
The Percentage Leases generally obligate the Company to make available
to the Lessees an amount equal to 4% or 5% of room revenue, on a monthly basis,
for use by the Lessees (or Marriott, under the Marriott Management Agreements)
to repair or replace furniture and equipment and for other capital expenditures
at the Hotels. The Company's obligation is cumulative and carries forward to the
extent that such amounts are not used by the Lessees (or Marriott). The Company
expended $30 million and $27 million in 1998 and 1997, respectively, for
furniture, fixtures and equipment and certain other capital expenditures. The
Company expects to spend approximately $20-$25 million for such purposes in
1999. These amounts substantially exceed the amounts required to be made
available under the Percentage Leases.
ACQUISITION STRATEGY
The Company's primary acquisition strategy includes acquiring hotels
that are (i) upscale extended-stay hotels, (ii) located in markets with
relatively high barriers to entry or strong demand characteristics and (iii)
located near other hotels owned by the Company thereby allowing the Lessees to
enhance revenue by capitalizing on local knowledge and directing overflow
business to Company-owned hotels. The Company also seeks to selectively acquire
under-performing hotels to which the Company can add value through repositioning
in the market, re-flagging to premium hotel brands or renovation. The Company
has increasingly emphasized the acquisition of hotel portfolios in order to
capitalize on the Company's efficiency and experience in acquisition analysis
and transaction structuring. This emphasis has enabled the Company to more
rapidly expand its hotel portfolio.
Acquisition of Upscale Extended-Stay Hotels
The Company focuses on acquiring upscale extended-stay hotels because
of the strong performance of that segment, which has resulted primarily (i) from
the prevailing social and economic changes that are increasing the demand for
upscale extended-stay hotels, including the increasing tendency of businesses to
conduct on- and off-site training to employees, corporate out-sourcing and the
use of consultants, and the general increased mobility of the United States
workforce, (ii) from the ability to generate a more consistent revenue stream
than traditional hotels due to higher average occupancies and longer average
stays and (iii) because the demand for hotel rooms by guests who stay longer
than five consecutive room nights has exceeded the number of
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currently existing extended-stay hotel rooms, according to industry sources. The
Company also believes that its relationships, particularly with Marriott, will
provide it with opportunities to acquire desirable hotel properties, primarily
in the upscale extended-stay segment, through noncompetitive bid situations on
terms that may be generally more favorable than those available in traditional
brokered transactions.
Target Markets
The Company's focus is on markets that have high barriers to entry,
such as in New England, the Middle Atlantic and the Pacific coast states, which
are characterized by scarcity or high cost of available land, extensive permit
approval requirements, restrictive zoning, stringent local development laws, a
relatively long lead time required to develop an upscale extended-stay hotel and
the high costs associated with such development. In addition, the Company seeks
out submarkets within favorable regions that have multiple fast-growing demand
generators, such as major office or manufacturing complexes, airports, major
colleges and universities and medical centers with convenient access to major
thoroughfares. Additionally, the Company seeks Hotels in proximity to the
Company's existing Hotels, where the Company and the Lessees may draw upon their
knowledge of local market conditions, develop certain economies of scale and
cross market among the Hotels in the cluster.
Acquisition of Under-performing Hotels
Although the primary focus of the Company is on the upscale
extended-stay segment, the Company will from time to time consider acquisition
of under-performing mid-priced and full service hotels that have the potential
for strategic repositioning in the market, re-flagging to a premium franchise
brand or renovation. Generally, hotels that meet the Company's investment
criteria include (i) poorly managed hotels that have the potential for increased
performance following the introduction of a quality management team, (ii) hotels
in deteriorated physical condition that could benefit significantly from
renovations, or (iii) hotels in attractive locations that the Company believes
could benefit significantly by changing franchises to a brand the Company
believes is superior, such as Hampton Inn or Courtyard by Marriott.
Development
The Company is committed to purchase a 95-room TownePlace Suites by
Marriott hotel located in Horsham, Pennsylvania, for approximately $8 million
upon completion of its development, which is anticipated in May 1999. This hotel
is expected to be leased to the IH Lessee under a Percentage Lease, and the IH
Lessee is expected to enter into a contract with Marriott under which Marriott
will manage the hotel. The Company has obtained certain of the benefits of
development without incurring certain of its risks by (i) acquiring
newly-developed hotels or, (ii) as with the Horsham, Pennsylvania hotel,
contracting with developers to build hotels that the Company buys upon
completion. The Company may seek additional opportunities of this nature.
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The Company also reviews development opportunities for hotels that are
consistent with its target market, product and brand strategies. The Company
intends to only pursue selective development of hotels that meet its
underwriting requirements, (i) when the Company believes that projected
incremental returns adequately compensate for any incremental risk assumed by
the Company, (ii) when the Company believes that a hotel developed by the
Company will create or increase synergies with other Company-owned hotels in the
area that will enhance the performance of all of those hotels or (iii) in order
to maintain control of a site determined to have superior hotel potential.
Risks associated with development and construction activities may
include: the abandonment of development opportunities explored by the Company
and the write-off of associated costs; construction costs exceeding original
estimates due to increased materials, labor or other expenses, which could make
completion of the hotel uneconomical; operating results at a newly completed
hotel are dependant on a number of factors, including market and general
economic conditions, competition and market acceptance, and such hotels may not
meet pre-development operating projections; financing may not be available on
favorable terms for the development of a hotel; and construction and
stabilization may not be completed on schedule, resulting in increased debt
service expense and construction costs. Development activities are also subject
to risks relating to the inability to obtain, or delays in obtaining, all
necessary zoning, land-use, building, occupancy, and other required governmental
permits and authorizations. The occurrence of any of the events described above
could adversely affect the Company's ability to achieve projected yields on
hotels that it develops or on newly built hotels that it acquires, and could
adversely affect the Company's ability to make expected distributions.
PROPERTY OPERATIONS
The IH Lessee
The Company believes that the quality of the on-site hotel operators is
important to the future growth in Percentage Lease revenue from the Hotels. The
IH Lessee leases 56 of the Hotels pursuant to the Percentage Leases and operates
31 of the Hotels. Marriott operates 23 Residence Inn by Marriott hotels pursuant
to the Marriott Management Agreements. Marriott is the largest operator of
upscale extended-stay hotels in the U.S. The Company believes that Marriott's
management of Hotels will enable the Company to realize the benefits of
Marriott's resources and broad-based hotel operations experience in order to
enhance the Company's ability to grow.
The IH Lessee is owned by Mr. Fisher and Mr. Shaw (the Chairman and
Chief Operating Officer, respectively, of the Company) and employs currently
approximately 1,200 people. Under the Percentage Leases, the IH Lessee generally
is required to perform or provide for all operational and management functions
necessary to operate the Hotels. Such functions include accounting, periodic
reporting, ordering supplies, advertising and marketing, maid service, laundry,
and repair and maintenance. In addition to on-site personnel at each hotel, the
IH Lessee
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employs regional managers and regional directors of sales who oversee the
operations, sales and marketing of all of the Hotels. The IH Lessee is entitled
to all revenue from the Hotels after payment of rent under the Percentage Leases
and other operating expenses, including any management fees payable to
third-party managers.
The IH Lessee-leased Hotels not operated under Marriott Management
Agreements are operated under franchise agreements and are licensed as Hampton
Inn, Residence Inn by Marriott, Courtyard by Marriott, Comfort Inn or Holiday
Inn Express hotels. The Company has paid or will pay the cost of obtaining or
transferring certain franchise license agreements to the IH Lessee. For the
hotels which do not require a franchise transfer fee, the Company has advanced
to the IH Lessee the working capital deposit required under the IH Lessee's
management agreements with Marriott. The franchise and management agreements
require the IH Lessee to pay fees based on a percentage of hotel revenue. The
franchisors periodically inspect their licensed hotels to confirm adherence to
their operating standards. The results of these inspections can be additional
capital expenditure requirements for the Company, or additional operational,
marketing or repairs/maintenance expense for the IH Lessee. The Company has
guaranteed certain of the IH Lessee's obligations under the franchise licenses,
generally in exchange for certain rights to substitute replacement lessees if
the Company terminates the related Percentage Lease. See "Properties -- The
Percentage Leases" for further information on the Percentage Leases.
Marriott Management
The Marriott Management Agreements allow the hotels subject thereto to
be operated as Residence Inn by Marriott hotels for the duration of the
agreements, provided that the hotels maintain the standards of the Residence Inn
system. The Marriott Management Agreements may be extended by Marriott for an
additional term if the Company has achieved a specified return on its initial
investment. Marriott may terminate one or more of the Marriott Management
Agreements upon the occurrence of certain events, including the IH Lessee's
failure to make any payment or perform other covenants under the Marriott
Management Agreements or a bankruptcy of the IH Lessee or the Company. If a
Marriott Management Agreement is terminated for any reason other than a default
by Marriott, the hotel to which the agreement relates will not be entitled to
operate thereafter as a Residence Inn by Marriott hotel. Marriott may be
terminated as manager of a hotel if certain performance criteria set forth in
the relevant Marriott Management Agreement are not met in any two consecutive
years beginning with the third anniversary of the Company's acquisition of the
hotel, subject to certain exceptions and cure rights. In that event, the IH
Lessee may enter into a then-current form of Residence Inn franchise license
and, subject to Residence Inn system requirements and to the IH Lessee being a
then-approved franchisee, continue to operate the hotel as a Residence Inn by
Marriott hotel.
Under each Marriott Management Agreement, the IH Lessee is required to
pay to Marriott a base management fee, a system fee and a marketing fee of
certain revenues at the relevant Hotel, and an incentive management fee based on
net income of the hotel. The IH Lessee is responsible for making all payments to
Marriott under the Marriott Management Agreements. The Company
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agreed to be secondarily liable for certain of the IH Lessee's obligations,
generally in exchange for certain rights to substitute replacement lessees if
the Company terminates the related Percentage Lease.
DeBoer Hotels
On November 1, 1996, the Company completed the acquisition of seven
Residence Inn by Marriott hotels ("the DeBoer Hotels") from affiliates of Jack
P. DeBoer (the "DeBoer Group"). The DeBoer Hotels are leased to the IH Lessee
under Percentage Leases and operated by Marriott under Marriott Management
Agreements. Following the acquisition of the DeBoer Hotels, Jack P. DeBoer
joined the Company's Board of Trustees.
In connection with the acquisition, the Partnership issued to the
DeBoer Group an aggregate of 4,063,329 preferred units of limited partnership
interest in the Partnership ("Preferred Units"). The Preferred Units are
convertible at any time into Common Units on a one-for-one basis and may be
redeemed for an amount of cash equal to the then-trading value of a Common Share
or, at the option of Innkeepers, one Common Share. Annual preferred
distributions of $1.10 to $1.155 are payable on each Preferred Unit, and are
based on the dividends payable on the Common Shares. The annual preferred
distribution for 1998 was $1.155. Due to the potential adverse tax consequences
to members of the DeBoer Group that may result from a sale of the DeBoer Hotels,
the Company has agreed with the DeBoer Group that for a period of up to ten
years following the closing of the acquisition of the DeBoer Hotels, (i) any
taxable sale of a DeBoer Hotel will require the consent of the applicable
members of the DeBoer Group and (ii) the Company will maintain at all times
outstanding indebtedness of $40 million, subject to reduction upon the
occurrence of certain events, including certain redemptions or taxable transfers
of Preferred Units by the applicable members of the DeBoer Group (the "Required
Indebtedness"). In the event that the Company fails to maintain the required
level of indebtedness, the Company will be liable for any resulting income tax
liabilities incurred by the applicable members of the DeBoer Group.
Summerfield Hotels
In June 1997, the Company acquired nine hotels from affiliates of Rolf
E. Ruhfus (the "Summerfield Group"). Following the acquisition of these hotels,
Mr. Ruhfus joined the Company's Board of Trustees. The Company leased the nine
hotels to the Summerfield Lessee. For the year ended December 31, 1998, the
Summerfield Lessee incurred or paid the Partnership an aggregate of
approximately $15.3 million in lease payments under the Percentage Leases for
these nine hotels. See "Business Risks - Conflicts of Interest" below. In
connection with the acquisition of these nine hotels, the Company issued 631,744
Common Units that remain outstanding. Beginning in July 1998, each Common Unit
held by the Summerfield Group may be redeemed, at the option of the holder, for
an amount of cash equal to the then-trading value of a Common Share, or, at the
option of Innkeepers, one Common Share.
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COMPETITION
For Guests
The hotel industry, and the upscale extended-stay and mid-price
segments of the lodging market in which the Company operates, is highly
competitive. Competitive factors within the industry include room rates, quality
of accommodations, name recognition, service levels, reputation, reservation
systems, convenience of location and the supply and availability of alternative
lodging. The Hotels compete with other existing and new hotels in their
geographic markets. The extended-stay and mid-price segments of the hotel
industry are very competitive, as several competitors have entered the market.
Many competitors have substantially greater marketing and financial resources
than the Company and the Lessees.
Each of the Hotels is located in a developed area that includes other
hotels, many of which are competitive with the Hotels in their locality. The
number of competitive hotels in a particular area could have a material adverse
effect on the revenues derived from the Hotels or hotels acquired in the future.
Many industry analysts have noted that the favorable supply/demand imbalance
that characterized much of the 1990s has moderated, and in some cases increases
in supply now exceed increases in demand in certain geographic markets and in
certain market segments. This has, in turn, resulted in lower occupancies,
moderating ADR increases and lower or flat RevPAR increases.
The Company believes that the reduction of credit availability and
generally lower stock prices for public hotel companies beginning in 1998 and
continuing into 1999 appears to be moderating the rate of increases in new hotel
supply in certain markets and segments. Moreover, the Company believes that many
of its hotels are in markets with high barriers to entry, which could also have
moderating affects on the levels of competitive new supply added to these
markets (See "Acquisition Strategy - Target Markets"). Finally, certain industry
analysts have noted relatively steady increases in demand for hotel rooms.
However, notwithstanding these moderating factors, there can be no assurances
that competitive new supply in the Company's markets does not or will not
negatively impact the performance of the Company's hotels, whose customers may
be drawn to brand-new hotels offering lodging in comparable locations at prices
competitive with (or lower than) those offered by the Company's hotels.
Similarly, there can be no assurance that new or existing competitors will not
significantly reduce their rates or offer greater convenience, services or
amenities or significantly expand or improve their hotels in the markets in
which the Company does or will compete, all of which could materially adversely
affect the Company's business and results of operations.
For Acquisitions
Competition exists for investment opportunities in upscale
extended-stay and mid-price hotels from entities organized for purposes
substantially similar to the Company's objectives as well as other purchasers of
hotels. The Company may be competing for such hotel investment
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opportunities with entities that have substantially greater financial resources
than the Company or better relationships with franchisors, sellers or lenders.
These entities may also generally be able to accept more risk than the Company
prudently can manage. Competition may generally reduce the number of suitable
hotel investment opportunities offered to the Company and increase the
bargaining power of property owners seeking to sell, thereby increasing prices.
BUSINESS RISKS
Dependence on Payments under Percentage Leases; Lack Of Control
Certain rules relating to the qualification of a REIT prohibit a REIT
from operating hotels. Therefore, the Company leases the Hotels to the Lessees
pursuant to the Percentage Leases. The Company's primary source of revenue is
rent payments under the Percentage Leases. The Company must rely on the Lessees
and any third-party managers retained by the Lessees, such as Marriott and
Summerfield, to operate the Hotels in a manner that generates sufficient cash
flow to enable the Lessees to make the rent payments under the Percentage
Leases. Ineffective operation of the Hotels may result in the Lessees being
unable to pay rent to the Company, including the higher tier Percentage Rent
necessary for the Company to fund its current level of distributions to
shareholders.
Other than as set forth in the applicable Percentage Lease, the Company
does not have the authority to require a Hotel to be operated in a particular
manner, or to govern any particular aspect of its operation (e.g., setting room
rates). Thus, even if the Company's management believes a hotel is being
operated inefficiently or in a manner that does not result in a maximization of
rent to the Company, the Company cannot require a change in the method of
operation. The Company is limited to seeking redress only if the Lessees violate
the terms of the Percentage Leases, and then only to the extent of the remedies
set forth therein.
Risk of Rapid Growth; Dependence on Lessees and Third-Party Managers
The Company's ability to grow depends upon the ability of the Lessees
and any third-party manager retained by the Lessees, such as Marriott, to manage
effectively the Hotels, as well as any additional hotels in which the Company
invests. The Lessees' or any third-party managers' ability to operate additional
hotels under Percentage Leases or management agreements, as applicable, with
current staffing levels and office locations, may diminish as the Company
acquires additional hotels. Such growth may require the Lessees or managers to
hire additional personnel, engage additional third-party managers and operate in
new geographic locations. The Lessees have limited assets and generally the
Lessees must generate sufficient cash flow from the operation of the Hotels,
after payment of all operating expenses, to fund the Lessees' rent obligations
under the Percentage Leases. There can be no assurance that the Lessees or their
third-party managers will effectively operate the Hotels. In the event that the
Lessees and their third-party managers fail to effectively operate the Hotels,
the Company's internal growth strategy and acquisition
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strategy would be more difficult to achieve and, therefore, cash available for
distribution could be adversely affected.
Availability of Capital
The ability of the Company to implement its growth strategy depends on
access to capital necessary to invest in additional hotels through the use of
borrowings, subsequent issuances of common shares or other securities or
operating cash flow. Access to capital, and in particular equity capital, may be
negatively affected by economic conditions or negative perceptions about the
performance of or prospects for the real estate industry in general, the hotel
industry specifically and, more particularly, the Company.
Operating Costs and Capital Expenditures; Hotel Renovation
Hotels in general, including the Hotels, have an ongoing need for
renovations and other capital improvements, particularly in older structures,
including periodic replacement of furniture, fixtures and equipment at the
hotels. Under the terms of the Percentage Leases, the Company is obligated to
pay the cost of certain capital expenditures at the Hotels and pay for
furniture, fixtures and equipment. If these expenses exceed the Company's
estimate, the additional cost could have an adverse effect on the cash available
for distribution to shareholders. In addition, renovation of hotels involves
certain risks, including construction cost overruns and delays, uncertainties as
to market demand or deterioration in market demand after commencement of
renovation and the emergence of unanticipated competition in the local
geographic market.
Operating Risks
The Hotels are subject to all operating risks common to the hotel
industry. The hotel industry has experienced volatility in the past, as have the
Hotels, and there can be no assurance that such volatility will not occur in the
future. These risks include, among other things, declining economic conditions;
competition from other hotels; over-building in the hotel industry which has
adversely affected occupancy, ADR and RevPAR; increases in operating costs due
to inflation and other factors, which increases may not in recent years have
been, and may not necessarily in the future be, offset by increased room rates;
dependence on business and commercial travelers and tourism; strikes and other
labor disturbances of hotel employees; increases in energy costs and other
expenses of travel; and adverse effects of general and local economic
conditions. These factors could decrease room revenue of the Hotels and
adversely affect the Lessees' ability to make payments of rent under the
Percentage Leases to the Company, including payments at the higher tier
Percentage Rent levels.
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Risks of Operating Hotels under Franchise Licenses and Marriott
Management Agreements
The continuation of the franchise licenses under which certain of the
Hotels are operated is subject to specified operating standards and other terms
and conditions. The franchisors that have issued or will issue the franchise
licenses periodically inspect their licensed hotels to confirm adherence to
their operating standards. The failure of the Company or the Lessees to maintain
such standards respecting a Hotel or to adhere to such other terms and
conditions could result in the loss or cancellation of a franchise license. The
Marriott Management Agreements will allow the Hotels subject thereto to be
operated as Residence Inn by Marriott hotels so long as the Company does not
breach its obligations under the Percentage Leases relating to such Hotels.
Continued operation of such Hotels as Residence Inn by Marriott hotels also
requires the Company to make capital improvements as required by Marriott to
maintain the hotel in accordance with system standards. It is possible that a
franchisor or Marriott, as applicable, could condition the continuation of a
franchise license or a Marriott Management Agreement, as applicable, on the
completion of capital improvements which management or the Board of Trustees
determines are too expensive or otherwise not economically feasible in light of
general economic conditions or the operating results or prospects of the
affected hotel. In that event, the management or the Board of Trustees may elect
to allow the franchise license or Marriott Management Agreement to lapse or be
terminated. Similarly, the IH Lessee is obligated to fund any operating loss at
a Hotel operating under a Marriott Management Agreement. Operating losses could
result from a number of factors, including increased expenses resulting from
changes in Marriott's system standards. The IH Lessee has limited assets from
which to fund operating losses. If the IH Lessee fails or is unable to fund such
operating losses, Marriott may have the right to terminate the related Marriott
Management Agreement and with it the affected Hotel's right to operate as a
Residence Inn. In addition, when the term of a franchise license or a Marriott
Management Agreement expires, the franchisor or Marriott has no obligation to
issue a new franchise license or management agreement, as applicable, for the
hotel. The loss of a franchise license or a Marriott Management Agreement could
have a material adverse effect upon the operations or the underlying value of
the affected Hotel because of the loss of associated name recognition, marketing
support and centralized reservation systems provided by the franchisor or
Marriott. The loss of a franchise license or Marriott Management Agreement for
one or more of the Hotels could also have a material adverse effect on rent
under the Percentage Leases and cash available for distribution to shareholders.
Investment Concentration in Single Industry; Emphasis on Upscale
Extended-Stay Market Segment; and Emphasis on Residence Inn and Hampton Inn
Hotels
The Company's current growth strategy is to acquire operating hotels,
primarily upscale extended-stay hotels. The Company will not seek to invest in
assets selected to reduce the risks associated with an investment in the hotel
industry, and is subject to risks inherent in concentrating investments in a
single industry and in a single market segment within that industry. The Company
intends to emphasize the acquisition of Residence Inn by Marriott hotels in its
acquisition strategy. The Company will be subject to risks inherent in
concentrating investments
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in any franchise brand, in particular the Residence Inn and the Hampton Inn
brands, such as a reduction in business following any adverse publicity related
to a brand, which could have an adverse effect on the Company's Rent under the
Percentage Leases and cash available for distribution to shareholders.
Concentration of Investments in California, Florida, Washington, Texas
and Michigan
Eleven of the 63 Hotels are located in California, five are located in
each of Florida and Washington and four are located in each of Texas and
Michigan. The concentration of the Company's investments in California, Florida,
Washington, Texas and Michigan could result in adverse events, or conditions
which affect those areas in particular, such as economic recessions and natural
disasters, having a more significant negative effect on the operations of the
combined Hotels, and ultimately cash distributions to shareholders of the
Company, than if the Company's investments were more geographically diverse.
Ownership Limitation
In order for the Company to maintain its qualification as a REIT, not
more than 50% in value of its outstanding shares of beneficial interest may be
owned, directly or indirectly, by five or fewer individuals (as defined in the
Internal Revenue Code to include certain entities). Furthermore, if any
shareholder or group of shareholders of the IH Lessee or the Summerfield Lessee
own, actually or constructively, 10% or more of the shares of beneficial
interest of the Company, the IH Lessee or the Summerfield Lessee, as the case
may be, could become a related-party tenant of the Company and the Partnership,
which likely would result in loss of REIT status for the Company. For the
purpose of preserving the Company's REIT qualification, the Company's
Declaration of Trust prohibits direct or indirect ownership (taking into account
applicable ownership provisions of the Code) of more than 9.8% of the
outstanding common shares or any other class of outstanding shares of beneficial
interest by any shareholder or group (the "Ownership Limitation"). Generally,
the shares of beneficial interest owned by related or affiliated owners will be
aggregated for purposes of the Ownership Limitation. Any transfer of shares of
beneficial interest that would prevent the Company from continuing to qualify as
a REIT under the Code will be void ab initio, the intended transferee of such
shares will be deemed never to have had an interest in such shares, and such
shares will be designated "Shares-in-Trust." Further, the Company shall be
deemed to have been offered Shares-in-Trust for purchase at the lesser of the
market price (as defined in the Declaration of Trust) on the date the Company
accepts the offer and the price per share in the transaction that created such
Shares-in-Trust (or, in the case of a gift, devise or non-transfer event (as
defined in the Declaration of Trust), the market price on the date of such gift,
devise or non-transfer event). Therefore, the record holder of shares of
beneficial interest in excess of the Ownership Limitation will experience a
financial loss when such shares are redeemed, if the market price falls between
the date of purchase and the date of redemption.
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The Company has, in limited instances from time to time, permitted
certain owners to own shares in excess of the Ownership Limitation. The Board of
Trustees has waived the Ownership Limitation for such owners after following
procedures set out in the Company's Declaration of Trust, under which the owners
requesting the waivers provided certain information and the Company's counsel
provided certain opinions. These waivers established levels of permissible share
ownership for the owners requesting the waivers that are higher than the
Ownership Limitation - if the owners acquire shares in excess of the higher
limits, those shares are subject to the risks described above in the absence of
a further waiver. The Board of Trustees is not obligated to grant such waivers
and has no current intention to do so with respect to any owners who
(individually or aggregated as the Declaration of Trust requires) do not
currently own shares in excess of the Ownership Limitation.
General Risks of Investing in Real Estate
The Hotels are subject to varying degrees of risk generally incident to
the ownership of real property. Income from the Hotels may be adversely affected
by adverse changes in national economic conditions, adverse changes in local
market conditions due to changes in general or local economic conditions and
neighborhood characteristics, competition from other hotels, changes in interest
rates and in the availability, cost and terms of mortgage funds, the impact of
present or future environmental legislation and compliance with environmental
laws, the ongoing need for capital improvements, particularly in older
structures, changes in real estate tax rates and other operating expenses,
adverse changes in governmental rules and fiscal policies, civil unrest, acts of
God, including earthquakes, hurricanes and other natural disasters (which may
result in uninsured losses), acts of war, adverse changes in zoning laws, and
other factors which are beyond the control of the Company.
Real estate investments are relatively illiquid. The ability of the
Company to vary its portfolio in response to changes in economic and other
conditions is limited. In particular, the Company may not sell any of the DeBoer
Hotels in a taxable transaction for a period of up to ten years following the
closing of the Offering, without the consent of the applicable members of the
DeBoer Group. Certain provisions of the Marriott Management Agreements and the
Percentage Leases may also limit or delay the Company's ability to sell or
refinance the Hotels.
Each Percentage Lease specifies comprehensive insurance to be
maintained on each of the Hotels, including liability, property and casualty and
extended coverage. Management of the Company believes that such specified
coverage is of the type and amount customarily obtained by owners of hotels
similar to the Hotels. Percentage Leases for subsequently acquired hotels will
contain similar provisions. However, there are certain types of losses,
generally of a catastrophic nature, such as earthquakes, floods and hurricanes,
that may be uninsurable or not economically insurable and which may impact
certain of the Hotels.
All 11 of the Hotels in California are located in areas that are
subject to earthquake activity. These Hotels are located in areas of high
seismic risk and some were constructed under
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pre-1985 building codes. No assurance can be given that an earthquake would not
render significant damage to the Hotels that have been constructed in compliance
with more recent building codes, or are in areas of lower seismic risk.
Additionally, areas in Florida where five of the Hotels are located may
experience hurricane or high-wind activity. The Company has earthquake insurance
policies on the Hotels located in California and hurricane insurance policies on
the Hotels located in Florida. The Company's management and Board of Trustees
has used and will use its discretion in determining amounts, coverage limits and
deductibility provisions for insurance, with a view to maintaining appropriate
insurance coverage on the Company's investments at a reasonable cost and on
suitable terms, and may from time to time elect not to carry earthquake or
hurricane insurance. This may result in insurance coverage that, in the event of
a substantial loss, would not be sufficient to pay the full current market value
or current replacement cost of the Company's lost investment. Inflation, changes
in building codes and ordinances, environmental considerations, and other
factors also might make it not feasible to use insurance proceeds to replace a
hotel after it has been damaged or destroyed. Under such circumstances, the
insurance proceeds received by the Company might not be adequate to restore its
economic position with respect to a Hotel.
Conflicts of Interest
Messrs. Fisher and Shaw.
Conflicts of interest exist between the Company, on the one hand, and
the IH Lessee, Mr. Fisher (Chairman of the Board of Trustees, Chief Executive
Officer and President of the Company and the majority shareholder of the IH
Lessee) and Mr. Shaw (Executive Vice-President and Chief Operating Officer of
the Company and the minority shareholder in the IH Lessee), on the other hand,
with respect to the negotiation and enforcement of the terms of the current and
any future Percentage Leases with the IH Lessee. Conflicts also exist related to
possible adverse tax consequences to Mr. Fisher and his affiliates upon a sale,
refinancing or prepayment of indebtedness secured by certain Hotels contributed
to the Company by his affiliates. Additionally, the Company relies substantially
on Mr. Fisher and conflicting demands on his time occur, which could lead to
decisions which do not reflect solely the interests of the Company's
shareholders. Mr. Shaw also has conflicting demands on his time, including
serving as President of the IH Lessee and spending significant time in that
capacity.
Mr. DeBoer
Mr. DeBoer, who is one of the largest shareholders of the Company, on a
diluted basis, and who serves as a Trustee of the Company, and certain of his
affiliates have in the past, and continue to be, involved in the development of
hotels, including extended-stay hotels. Mr. DeBoer is the President, Chairman of
the Board and a major shareholder of Candlewood Hotel Company, Inc.
("Candlewood"), a public hotel company that is the owner, operator and
franchisor of Candlewood hotels, an economy extended-stay hotel chain founded by
Mr. DeBoer. Hotels developed by Mr. DeBoer and his affiliates, including
Candlewood hotels, may compete with the
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Company's hotels for guests, and other hotel companies with which Mr. DeBoer is
affiliated, including Candlewood, may compete with the Company for acquisition
opportunities. Due to the potential adverse tax consequences to the DeBoer Group
that may result from the sale of or refinancing or prepayment of indebtedness
associated with the DeBoer Hotels, the Company has agreed with the DeBoer Group
that, for a period of up to ten years following the closing of the acquisition
of the DeBoer Hotels, (i) any taxable sale of a DeBoer Hotel will require the
consent of the applicable members of the DeBoer Group, which may cause the
Company to be unable to sell some or all of the DeBoer Hotels in circumstances
in which it would be advantageous to do so, and (ii) the Company will maintain
the Required Indebtedness. Accordingly, the interests of the Company and Mr.
DeBoer may differ with respect to the Hotels, proposed acquisitions of hotels by
the Company that are competitive with hotels owned or being considered for
acquisition or development by Mr. DeBoer or his affiliates, proposed
acquisitions of hotels or sites by the Company that Mr. DeBoer or his affiliates
may also have an interest in acquiring, or proposed dispositions of certain of
the Company's Hotels that management believes are in the best interests of the
Company.
Additionally, the Company has, for the last two years, placed
substantially all of its insurance (including officers' and trustees' liability,
property, casualty, earthquake and worker's compensation coverages) with Manning
& Smith, Wichita, Kansas, a full service commercial insurance broker that has
developed a specialty in insuring hotels. During that same period, the IH Lessee
placed substantially all of its insurance (including worker's compensation,
employment practices liability, crime and, for the twelve months ended September
30, 1998, health care coverages) with Manning & Smith. Manning & Smith is a
private company of which Mr. DeBoer owns 47% of the stock. Mr. DeBoer has
informed the Company that he is not an officer of Manning & Smith and does not
participate actively in its management. For the policy year 1998 (ending
September 30, 1998), the gross amount of the premiums paid for coverages placed
by Manning & Smith for the Company was approximately $930,000 and for the IH
Lessee was approximately $755,000.
Mr. Ruhfus
Mr. Ruhfus is a Trustee of the Company, a shareholder of Patriot and a
Board member and non-executive Chairman of the all-suites division of Wyndham
International, Inc. Patriot is the franchisor of Summerfield Suites and Sierra
Suites hotels. Conflicts, therefore, exist between the Company, on the one hand,
and the Summerfield Lessee and Mr. Ruhfus, on the other hand, with respect to
the enforcement of the terms of the Percentage Leases with the Summerfield
Lessee. In addition, Summerfield Suites hotels that the Company does not own and
Sierra Suites hotels may compete with the Hotels for guests, and Patriot may
compete with the Company for acquisition opportunities. Mr. Ruhfus is also
Chairman of Summerfield Corporation, a private company which may engage in hotel
acquisition or development activity. This activity may include the acquisition
or development of upscale extended-stay hotels, such as Summerfield Suites (or
hotels that can be converted to such brands). Accordingly, the interests of the
Company, Mr. Ruhfus and Patriot could differ with respect to the Hotels,
proposed acquisitions of hotels by the
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Company that are competitive with hotels owned or being considered for
acquisition or development by Mr. Ruhfus or his affiliates, or proposed
acquisitions of hotels or sites by the Company that Mr. Ruhfus or his affiliates
may also have an interest in acquiring.
On October 23, 1998, the Company sold its three Sierra Suites hotels
for $19,950,000 to an affiliate of Mr. Ruhfus (the "Sierra Suites Buyer"). The
Company acquired two of the Sierra Suites hotels from affiliates of Mr. Ruhfus
in July 1997, when it acquired six other hotels from affiliates of Mr. Ruhfus,
and developed the third Sierra Suites hotel in 1998. In connection with the July
1997 acquisition, (a) the Company obtained the right to terminate the Percentage
Leases for its Sierra Suites hotels in certain circumstances and (b) the Sierra
Suites Buyer obtained the right to acquire from the Company any Sierra Suites
hotel with respect to which the Company exercised the above-referenced right to
terminate the related Percentage Lease. Under these provisions, if the
termination right was exercised for one or more hotels, the purchase prices to
be paid by the Sierra Suites Buyer would be equal to the Company's investment in
those hotels. When the Sierra Suites brand was acquired by affiliates of Patriot
in June 1998, the Company terminated the Percentage Leases for its three Sierra
Suites hotels. The Sierra Suites Buyer then exercised its right to acquire those
hotels. In connection with the acquisition of the three Sierra Suites hotels in
October 1998 by the Sierra Suites Buyer, the Company redeemed 233,612 of the
Common Units issued to the Summerfield Group when it sold the Company hotels in
July 1997. The Common Units that the Company redeemed in connection with the
sale to the Sierra Suites Buyer of the three Sierra Suites hotels had a deemed
value of $3,504,000, which was applied to the $19,950,000 purchase price.
LEVERAGE
To the extent the Company continues to incur debt, its debt service
requirements will reduce cash available for distribution to shareholders.
Variable rate debt, such as the Company's line of credit, creates higher debt
service requirements if interest rates increase, which may decrease cash
available for distribution to shareholders. There can be no assurances that the
Company will be able to meet its debt service obligations. To the extent that it
cannot meet its debt service obligations, the Company risks the loss of some or
all of its assets to foreclosure or forced sale. Changes in economic conditions
could result in higher interest rates on variable rate debt, including
borrowings under the Company's line of credit, reduce the availability of debt
financing generally or at rates deemed favorable to the Company, reduce cash
available for distribution to shareholders and increase the risk of loss upon a
sale or foreclosure. The Company also may obtain one or more forms of interest
rate protection on variable rate debt (e.g., swap agreements or interest rate
cap contracts) and will consider additional long-term fixed-rate financing to
further hedge against the possible adverse effects of interest rate
fluctuations. Adverse economic conditions could cause the terms on which
borrowings become available to be less favorable than at present. In such
circumstances, if the Company is in need of capital to repay indebtedness in
accordance with its terms or otherwise, it could be required to liquidate one or
more investments in Hotels or lose one or more Hotels to foreclosure, either of
which could result in a material financial loss to the Company.
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ENVIRONMENTAL MATTERS
Under various federal, state and local laws and regulations, an owner
or operator of real estate may be liable for the costs of removal or remediation
of certain hazardous or toxic substances on such property. Such laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of hazardous or toxic substances. Furthermore, a
person that arranges for the disposal or transports for disposal or treatment a
hazardous substance at a property owned by another may be liable for the costs
of removal or remediation of hazardous substances released into the environment
at that property. The costs of remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to promptly
remediate such substances, may adversely affect the owner's ability to sell real
estate or to borrow using such real estate as collateral. In connection with the
ownership and operation of the Hotels, the Company, the Partnership or the
Lessees, as the case may be, may be potentially liable for any such costs.
Phase I environmental site assessments ("ESAs") generally are obtained
on hotels at the time of acquisition by the Company. The Company generally
intends to obtain an ESA on any other hotel acquired in the future. The ESAs are
and were intended to identify potential environmental contamination for which
the Hotels may be responsible. The ESAs included historical reviews of the
Hotels, reviews of certain public records, preliminary investigations of the
sites and surrounding properties, screening for the presence of hazardous
substances, toxic substances and underground storage tanks, and the preparation
and issuance of a written report. The ESAs did not include invasive procedures,
such as soil sampling or ground water analysis.
The ESAs have not revealed any environmental liability or compliance
concerns that the Company believes would have a material adverse effect on the
Company's business, assets, results of operations or liquidity, nor is the
Company aware of any such liability. Nevertheless, it is possible that these
ESAs do not reveal all environmental liabilities or that there are material
environmental liabilities or compliance concerns of which the Company is
unaware. Moreover, no assurances can be given that (i) future laws, ordinances
or regulations will not impose any material environmental liability or (ii) the
current environmental condition of the Hotels will not be affected by the
condition of properties in the vicinity of the Hotels (such as the presence of
leaking underground storage tanks) or by third parties unrelated to the
Partnership, the Lessees or the Company.
TAX STATUS
The Company has elected to be taxed as a REIT under Sections 856-860 of
the Internal Revenue Code of 1986, as amended (the "Code"). If the Company
qualifies for taxation as a REIT, with certain exceptions, the Company will not
be subject to federal income tax at the Company level on its taxable income that
is distributed to its shareholders. A REIT is subject to a number of
organizational and operational requirements, including a requirement that it
currently distribute at least 95% of its annual taxable income. Failure to
qualify as a REIT will render the Company subject to federal income tax
(including any applicable minimum tax) on its taxable
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income at regular corporate rates and distributions to the holders of Common
Shares in any such year will not be deductible by the Company. If the Internal
Revenue Service were to challenge successfully the tax status of the Partnership
as a partnership for federal income tax purposes, the Partnership would be
taxable as a corporation. In such event, the Company would likely cease to
qualify as a REIT for a variety of reasons. Although the Company does not intend
to request a ruling from the Service as to its REIT status or the partnership
status of the Partnership, the Company has, in the past, obtained the opinion of
its legal counsel that, as of the date of the opinion, the Company qualifies as
a REIT. The opinion was based on certain assumptions and representations and is
not binding on the Service or any court. Even if the Company qualifies for
taxation as a REIT, the Company may be subject to certain federal, state and
local taxes on its income and property.
23
<PAGE> 26
ITEM 2. PROPERTIES
The following tables set forth certain information with respect to the
Hotels that were owned by the Company as of December 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
NUMBER --------------------------------------------------
YEAR OF SUITES/ ROOM LEASE
OPENED ROOMS REVENUE PAYMENT OCCUPANCY ADR REVPAR
------ ----- ------- ------- --------- --- ------
(1) (2) (3) (3) (3)
<S> <C> <C> <C> <C> <C> <C> <C>
Residence Inn:
Addison, TX ................... 1996 150 $ 4,334,125 $ 2,191,992 86.25% $ 91.79 $ 79.16
Altamonte Springs, FL ......... 1985 128 3,498,627 1,434,727 77.82 96.23 74.88
Arlington, TX.................. 1995 114 3,173,940 1,516,365 85.71 89.00 76.28
Atlanta (Downtown), GA......... 1996 160 4,165,769 1,572,283 81.35 87.69 71.33
Atlanta (Peachtree Corners), GA 1998 120 524,078 171,342 66.10 75.59 49.96
Bellevue, WA .................. 1984 120 4,484,868 2,334,605 85.55 123.41 105.58
Binghamton, NY ................ 1987 72 2,084,058 965,365 84.69 93.64 79.30
Bothell, WA .................. 1991 120 3,268,921 1,538,639 81.55 92.75 75.63
Cherry Hill, NJ ............... 1989 96 3,201,397 1,489,111 86.54 105.58 91.36
Columbus East, OH ............. 1986 80 1,893,393 637,940 81.67 79.39 64.84
Denver (Downtown), CO ......... 1982 156 4,761,204 2,127,913 89.19 93.75 83.62
Denver (South), CO ............ 1981 128 3,741,754 1,827,187 87.62 91.41 80.09
East Lansing, MI .............. 1984 60 1,537,862 662,967 83.44 84.16 70.22
Eden Prairie, MN .............. 1985 126 3,476,397 1,698,024 83.36 90.68 75.59
Fort Wayne, IN ................ 1985 80 1,709,456 695,989 83.29 70.29 58.54
Fremont, CA ................... 1985 80 3,193,017 1,573,610 84.37 129.61 109.35
Gaithersburg, MD .............. 1998 132 1,894,440 914,796 74.10 107.26 79.48
Grand Rapids, MI .............. 1984 96 2,219,369 966,583 78.57 80.62 63.34
Harrisburg, PA ................ 1988 80 2,389,108 1,074,763 85.35 95.86 81.82
Indianapolis, IN .............. 1984 88 1,970,911 632,799 78.92 77.75 61.36
Lexington, KY ................. 1985 80 2,092,999 865,660 86.99 82.40 71.68
Louisville, KY ................ 1984 96 3,008,462 1,468,884 90.07 95.32 85.86
Lynnwood, WA .................. 1987 120 3,523,250 1,680,705 87.51 93.95 82.22
Mountain View (Palo Alto), CA . 1985 112 5,908,291 3,539,524 86.53 167.02 144.53
Ontario, CA ................... 1986 200 4,520,540 1,949,027 75.72 82.20 62.24
Portland, ME .................. 1996 78 2,511,437 1,205,048 90.44 97.54 88.21
Portland South, OR ............ 1984 112 2,844,996 1,302,005 77.87 92.02 71.65
Richmond, VA .................. 1986 80 2,408,072 1,109,573 87.14 94.64 82.47
San Jose, CA .................. 1986 80 3,698,347 1,917,234 86.89 145.76 126.66
San Jose South, CA ............ 1998 150 744,511 318,354 70.90 119.68 84.85
San Mateo, CA ................. 1985 159 6,853,740 3,675,103 85.86 137.55 118.10
Shelton, CT ................... 1988 96 3,774,217 1,995,372 87.39 123.25 107.71
Silicon Valley I, CA ......... 1983 231 9,849,965 5,611,936 77.36 151.02 116.82
Silicon Valley II, CA ......... 1985 247 9,773,505 5,556,666 71.54 151.53 108.41
Troy (Central), MI ............ 1986 152 4,529,252 2,322,879 84.85 96.22 81.64
Troy (Southeast), MI .......... 1985 96 2,646,922 1,242,106 78.99 95.64 75.54
Tukwila, WA ................... 1985 144 4,854,755 2,512,785 91.17 103.97 94.80
Vancouver, WA ................. 1987 120 3,111,391 1,473,985 84.25 86.47 72.85
Wichita East, KS .............. 1981 64 1,586,842 608,278 83.33 81.52 67.93
Windsor, CT ................... 1986 96 3,047,463 1,355,104 84.20 103.29 86.97
Winston-Salem, NC ............. 1986 88 2,212,999 808,901 85.37 80.70 68.90
Summerfield Suites
Addison, TX ................... 1996 132 3,957,715 1,727,463 72.96 112.58 82.14
Belmont, CA ................... 1995 132 5,579,611 2,982,500 81.33 142.39 115.81
El Segundo, CA ................ 1995 122 4,500,258 2,176,405 86.38 117.00 101.06
Irving (Las Colinas), TX ...... 1996 148 4,904,829 2,364,730 77.58 117.04 90.80
Mount Laurel, NJ .............. 1996 116 4,029,804 1,768,653 85.48 111.35 95.18
West Hollywood, CA ............ 1993 109 3,972,828 1,927,690 80.53 124.01 99.86
Hampton Inn:
Albany/Latham, NY ............. 1990 126 2,185,683 1,075,359 64.28 73.93 47.53
Germantown, MD ................ 1987 176 2,855,638 1,379,918 60.34 73.67 44.45
Islandia (Long Island), NY .... 1988 121 3,290,287 1,679,656 80.11 92.99 74.50
</TABLE>
24
<PAGE> 27
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Lombard (Chicago), Il .......... 1987 128 2,357,191 1,097,270 67.20 75.07 50.45
Naples, FL ..................... 1990 107 1,987,088 866,538 68.54 74.23 50.88
Norcross, GA ................... 1996 150 1,667,696 697,249 50.76 60.42 30.66
Schaumburg (Chicago), IL ....... 1986 128 2,790,870 1,478,602 75.16 79.48 59.74
Tallahassee, FL ................ 1993 93 1,812,686 914,096 79.93 66.81 53.40
West Palm Beach, FL ............ 1986 136 2,362,218 962,247 76.62 62.11 47.59
Westchester (Chicago), IL ...... 1988 112 2,517,898 1,325,771 76.44 80.58 61.59
Willow Grove (Philadelphia), PA 1991 150 3,821,714 2,106,410 79.63 87.66 69.80
Woburn, MA ..................... 1981 100 2,673,193 1,374,291 73.86 100.16 73.98
Sunrise Suites
Eatontown (Tinton Falls), NJ ... 1993 96 2,534,857 829,313 77.84 92.94 72.34
Comfort Inn:
Allentown, PA .................. 1990 127 1,931,254 973,707 72.17 57.73 41.66
Holiday Inn Express:
Lexington, MA .................. 1971 204 4,567,466 2,421,877 72.10 85.07 61.34
Courtyard by Marriott:
Fort Lauderdale, FL ............ 1988 139 1,671,085(4) 788,973(4) 80.74(4) 70.23(4) 56.71(4)
Hotels sold during 1998(5) 3,591,816 1,556,972 N/A N/A N/A
Consolidated Total/
Weighted average ................... 7,639 $212,588,335 $103,021,819 79.78% $ 99.09 $ 79.05
===== ============ ============
</TABLE>
- -----------------------
(1) With respect to Hotels acquired in 1998, represents the hotels' room
revenue from the date of acquisition by the Company.
(2) Represents Percentage Lease revenue from the Lessees to the Company
calculated in accordance with the Percentage Leases.
(3) Represents the occupancy, ADR and RevPAR of the Hotels for the year
including the period, if any, prior to ownership by the Company.
(4) Represents the period in 1998 that the hotel was open, January 1, 1998
to July 31, 1998, during which it operated as a Sheraton Hotel. The
hotel was closed on August 1, 1998 for renovation and re-opened on
March 1, 1999.
(5) Represents revenues and lease payments for three Sierra Suites hotels
sold in October 1998.
THE PERCENTAGE LEASES
Each Percentage Lease contains provisions similar to those described
below, and the Company intends that future percentage leases with respect to
additional hotels it may acquire will contain similar provisions.
Percentage Lease Terms. Each Percentage Lease has a non-cancelable term
of at least ten years, subject to earlier termination upon the occurrence of
defaults thereunder and certain other events described in the Percentage Lease.
Certain of the Percentage Leases contain renewal terms of up to 15 years, at the
Lessees' option. Under the renewal provisions, the rent formulas is re-set to
produce a then-current market rate rent.
Amounts Payable Under the Percentage Leases. During the term of each
Percentage Lease, the Lessees are obligated to pay to the Partnership (i) the
greater of a fixed annual Base Rent or Percentage Rent, and (ii) certain other
amounts, including interest accrued on any late payments or charges (the
"Additional Charges"). Percentage Rent is based on percentages of room revenues
for each of the Hotels. For all Percentage Leases, both the Base Rent and the
Revenue Break Point in each Percentage Rent formula are (a) adjusted annually
for inflation and (b) in the case of the Revenue Break Point (as defined in
"Internal Growth Strategy" above) for certain of the Hotels managed by Marriott,
increased to specified levels (not tied to inflation) in the first years after
execution. With respect to adjustments for inflation, the adjustment will be
calculated at the beginning of each calendar year based upon the change in the
CPI during the prior calendar
25
<PAGE> 28
year. The Company receives between 30% and 36.5% of room revenue up to the
Revenue Break Point and between 68% and 70% of room revenue in excess of the
Revenue Break Point. The Base Rent for seven of the Hotels leased to the
Summerfield Lessee reduces in 1999, as described in "Internal Growth Strategy"
above, and beginning in 2000 will adjust annually for inflation.
Other than real estate and personal property taxes, ground lease rent
(where applicable), the cost of certain furniture and equipment and certain
capital expenditures, and property and casualty insurance (for the hotels leased
by the IH Lessee), which are obligations of the Company, the Percentage Leases
require the Lessees to pay Base Rent, Percentage Rent, Additional Charges and
the operating expenses of the Hotels (including insurance, utility and other
charges incurred in the operation of the Hotels) during the terms of the
Percentage Leases. The Percentage Leases also provide for rent reductions and
abatements in the event of damage or destruction or a partial taking of any
Hotel.
Maintenance and Modifications. Under the Percentage Leases, the Company
is required to pay for capital improvements at each Hotel. In addition, the
Percentage Leases obligate the Company to make available to the Lessees for the
repair, replacement and refurbishment of furniture and equipment and certain
other capital expenditures at the Hotels, when and as deemed necessary by the
Lessees, an amount equal to 4% or 5% of room revenues, per month on a cumulative
basis. The Company's obligation is carried forward to the extent that the
Lessees have not expended such amount, and any unexpended amounts remain the
property of the Company upon termination of the Percentage Leases. In addition,
the Company intends to cause the expenditure of amounts in excess of the
obligated amounts if necessary to comply with the reasonable requirements of any
franchise license or Marriott Management Agreement and otherwise to the extent
that the Company deems such expenditures to be in the best interests of the
Company. Otherwise, the Lessees are required, at their expense, to (i) maintain
the Hotels in good order and repair, (ii) pay for all operating expenses of the
Hotels and (iii) comply with the requirements of any Company loan agreement (to
the extent applicable to property operations or cash management), any franchise
agreement and (with respect to the IH Lessee) the Marriott Management
Agreements.
The Lessees, at their expense, may make non-capital and capital
additions, modifications or improvements to the Hotels, provided that such
action does not significantly alter the character or purposes of the Hotels or
significantly detract from the value or operating efficiencies of the Hotels.
All such alterations, replacements and improvements shall be subject to all the
terms and provisions of the Percentage Leases and become the property of the
Company upon termination of the Percentage Leases. The Company owns, with
respect to the Hotels, substantially all personal property (other than
inventory, linens and other nondepreciable personal property) not affixed to, or
deemed a part of, the real estate or improvements thereon, except to the extent
that ownership of such personal property would cause the rent under a Percentage
Lease not to qualify as "rents from real property" for REIT income test
purposes.
26
<PAGE> 29
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently involved in any material litigation, nor,
to its knowledge, is any material litigation threatened against the Company or
its properties, other than routine litigation arising in the ordinary course of
business and which is expected to be covered by the Company's liability
insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The information called for in this item is incorporated by reference
from the "Corporate Information" section of the Company's 1998 Annual Report,
which section is filed in Exhibit 13.1 to this Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
The information called for in this item with respect to the Company and
its predecessor is incorporated by reference from the "Selected Financial Data"
section of the 1998 Annual Report, which section is filed in Exhibit 13.1 to
this Form 10-K.
With respect to the IH Lessee, the following table sets forth selected
historical financial data for the years ended December 31, 1998, 1997, 1996 and
1995 and the period September 30, 1994 (inception) through December 31, 1994.
The following selected financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included, or incorporated by reference, herein.
27
<PAGE> 30
IH LESSEE
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
Period from
September 30, 1994
Years Ended December 31, (Inception) to
--------------------------------------------------------- December 31,
1998 1997 1996 1995 1994
-------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Room revenue $179,366 $117,170 $58,501 $24,412 $3,404
Other revenue 9,213 7,333 4,222 1,895 372
-------- -------- ------- ------- ------
Total revenue 188,579 124,503 62,723 26,307 3,776
Hotel operating expenses 94,370 61,320 32,274 13,696 2,041
-------- -------- ------- ------- ------
Income before Lessee
overhead and Percentage
Lease expense 94,209 63,183 30,449 12,611 1,735
Percentage Lease expense 87,735 57,486 27,466 11,268 1,480
Lessee overhead 2,364 2,210 2,273 952 132
-------- -------- ------- ------- ------
Net income (1) $ 4,110 $ 3,487 $ 710 $ 391 $ 123
======== ======== ======= ======= ======
</TABLE>
(1) The IH Lessee has elected status as a Subchapter S corporation for federal
income tax purposes and, generally, pays no corporate level tax on its net
income.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information called for in this item with respect to the Company and
its predecessor is incorporated by reference from the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section of the
1998 Annual Report, which section is filed in Exhibit 13.1 to this Form 10-K.
The following is a discussion of the results of operations for the IH
Lessee.
Comparison of Year Ended December 31, 1998 ("1998") to the Year Ended
December 31, 1997 ("1997")
The IH Lessee had total revenue for 1998 of $188,579,000, consisting of
$179,366,000 of room revenue and $9,213,000 of other revenue. Room revenue
increased by $62,196,000, or 53% from $117,170,000 for 1997. This increase was
primarily due to the number of Hotels leased increasing from 32 at January 1,
1997 to 47 at January 1, 1998 and to 56 at December 31, 1998.
28
<PAGE> 31
Percentage Lease payments and hotel operating expenses for 1998 were
$87,735,000 and $94,370,000, respectively. Percentage Lease payments and hotel
operating expenses increased by $30,249,000 or 53% and $33,050,000 or 54%,
respectively from $57,486,000 and $61,320,000 for 1997, respectively. These
increases were primarily due to the number of Hotels leased increasing from 32
at January 1, 1997 to 47 at January 1, 1998 and to 56 at December 31, 1998. Net
income for 1998 was $4,110,000. Net income increased $623,000, or 18%, from
$3,487,000 for 1997.
Departmental profit as a percentage of gross operating revenue was
79.2% in 1998 and 1997. Net income as a percentage of gross operating revenue
decreased to 2.2% in 1998 from 2.8% in 1997.
Comparison of Year Ended December 31, 1997 ("1997") to the Year Ended
December 31, 1996 ("1996")
The IH Lessee had total revenue for 1997 of $124,503,000, consisting of
$117,170,000 of room revenue and $7,333,000 of other revenue. Room revenue
increased by $58,669,000, or 100% from $58,501,000 for 1996. This increase was
primarily due to the number of Hotels leased increasing from 18 at January 1,
1996 to 32 at January 1, 1997 and to 47 at December 31, 1997.
Percentage Lease payments and hotel operating expenses for 1997 were
$57,486,000 and $61,320,000, respectively. Percentage Lease payments and hotel
operating expenses increased by $30,020,000 or 109% and $29,046,000 or 90%,
respectively from $27,466,000 and $32,274,000 for 1996, respectively. These
increases were primarily due to the number of Hotels leased increasing from 18
at January 1, 1996 to 32 at January 1, 1997 and to 47 at December 31, 1997. Net
income for 1997 was $3,487,000. Net income increased $2,777,000, or 391%, from
$710,000 for 1996.
Departmental profit as a percentage of gross operating revenue
increased to 79.2% in 1997 from 77.2% in 1996. Net income as a percentage of
gross operating revenue increased to 2.8% in 1977 from 1.1% in 1996. These
increases were due primarily to operational efficiencies achieved in 1997.
Liquidity and Capital Resources
The IH Lessee's principal source of revenue is the revenue derived from
the hotels it operates under lease from the Company. The IH Lessee is dependent
on this revenue to provide cash for the payment of its operating expenses,
insurance, overhead and Percentage Lease payments. The IH Lessee has nominal net
worth and is dependent upon the cash flow from operating activities to meet
substantially all of its liquidity needs, including working capital and
distributions to its shareholders. The IH Lessee does not currently have any
established borrowing facilities. The IH Lessee believes that its cash flow
provided by operating activities will be sufficient to meet its liquidity needs.
29
<PAGE> 32
Net cash flow from operating activities was $11,948,000 in 1998. Net
cash flow used in investing activities was $1,149,000 in 1998, which consisted
primarily of the purchase of marketable securities. Net cash flow used in
financing activities was $5,100,000 in 1998, which consisted primarily of
distributions paid to its shareholders.
Seasonality of Hotel Business
The hotel industry is seasonal in nature. Historically, the operations
of the Hotels have generally reflected higher occupancy rates and ADR during the
second and third quarters.
Inflation
Operators of hotels, including the IH Lessee and any third-party
managers retained by the IH Lessee, in general possess the ability to adjust
room rates quickly. However, competitive pressures have limited and may in the
future limit the ability of the IH Lessee and any third-party manager retained
by the IH Lessee to raise room rates in response to inflation.
Impact of Year 2000
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any computer
program that has date sensitive software may recognize a date using "00" as the
year 1900 rather than as the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in a similar normal business activities.
The IH Lessee has recently assessed its internal computer systems and
believes that the current systems used will properly utilize dates beyond
December 31, 1999. The IH Lessee has been informed that its third party managers
are in the process of studying the year 2000 issue, including inquiries of their
vendors. Upon completion of the management companies' studies, which is expected
in mid-1999, the IH Lessee will determine the extent to which it is vulnerable
to the third parties' failure to remediate their own year 2000 issues and the
costs associated with resolving this issue. Attention is also directed to the
Company's disclosure on the year 2000 issue contained in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section of the Company's 1998 Annual Report, which section is filed in Exhibit
13.1 to this Form 10-K.
Forward Looking Statements
Management's discussion and analysis of financial condition and results
of operations contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including, without limitation, statements
containing the words "believes," "anticipates," "expects" and words of similar
import. Such forward-looking statements relate to future events and the future
financial performance of the IH Lessee, and involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements
30
<PAGE> 33
of the IH Lessee to be materially different from the results or achievements
expressed or implied by such forward-looking statements. The IH Lessee is not
obligated to update any such factors or to reflect the impact of actual future
events or developments on such forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to the General Instructions to Item 305 of Regulation S-K, the
quantitative and qualitative disclosure called for by this Item 7A. and by Item
305 of Regulation S-K are inapplicable to the Company at this time.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The quarterly results of operations are incorporated by reference from
the relevant section of the Company's 1998 Annual Report, which section is filed
in Exhibit 13.1 to this Form 10-K.
The following financial statements are incorporated by reference from
the Financial Statements included in the Company's 1998 Annual Report, which
statements are filed in Exhibit 13.1 to this Form 10-K.
INNKEEPERS USA TRUST
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1998
and 1997
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
31
<PAGE> 34
The following financial statements are included herein on the pages
indicated.
<TABLE>
<S> <C>
INNKEEPERS HOSPITALITY
Report of Independent Accountants...........................................................................33
Combined Balance Sheets at December 31, 1998 and
December 31, 1997..........................................................................................34
Combined Statements of Income for the years ended
December 31, 1998, 1997 and 1996 ..........................................................................35
Combined Statements of Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996 ..............................................................36
Combined Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 ..........................................................................37
Notes to Combined Financial Statements......................................................................38
FINANCIAL STATEMENT SCHEDULE OF INNKEEPERS USA TRUST
Report of Independent Accountants...........................................................................42
Schedule 3 - Real Estate and Accumulated Depreciation
at December 31, 1998......................................................................................43
</TABLE>
32
<PAGE> 35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Innkeepers Hospitality
In our opinion, the accompanying combined balance sheets and the related
combined statements of income, of shareholders' equity and of cash flows present
fairly, in all material respects, the financial position of Innkeepers
Hospitality (as described in Note 1) as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the three years ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of Innkeepers Hospitality's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Dallas, Texas
March 19, 1999
33
<PAGE> 36
INNKEEPERS HOSPITALITY
COMBINED BALANCE SHEETS
December 31, 1998 and 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $13,562 $ 7,863
Marketable securities 2,366 1,775
Accounts receivable, net 4,384 3,090
Inventory -- 23
Prepaid expenses 443 351
------- -------
Total current assets 20,755 13,102
Other assets 158 180
------- -------
Total assets $20,913 $13,282
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,139 $ 3,061
Accrued expenses 3,466 2,055
Payable to Manager 2,442 2,025
Due to Partnership 9,882 3,791
------- -------
Total current liabilities 19,929 10,932
Other long-term liabilities 745 585
------- -------
Total liabilities 20,674 11,517
------- -------
Commitments and contingencies (Note 3)
Shareholders' equity:
Common shares, $1 par value, 7,000 shares and
3,000 shares authorized, issued and outstanding
at December 31, 1998 and 1997, respectively 7 3
Unrealized gain on marketable securities 26 562
Retained earnings 206 1,200
------- -------
Total shareholders' equity 239 1,765
------- -------
Total liabilities and shareholders' equity $20,913 $13,282
======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
34
<PAGE> 37
INNKEEPERS HOSPITALITY
COMBINED STATEMENTS OF INCOME
For the years ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Gross operating revenue:
Rooms $ 179,366 $ 117,170 $ 58,501
Food and beverage 290 636 687
Telephone 3,455 4,167 2,231
Other 5,468 2,530 1,304
--------- --------- --------
Gross operating revenue 188,579 124,503 62,723
Departmental expenses:
Rooms 35,603 22,637 12,404
Food and beverage 322 583 583
Telephone 1,523 1,480 850
Other 1,847 1,148 470
--------- --------- --------
Total departmental profit 149,284 98,655 48,416
--------- --------- --------
Unallocated operating expenses:
General and administrative 15,059 8,754 3,943
Franchise and marketing fees 11,659 8,833 4,492
Advertising and promotions 8,806 4,204 2,305
Utilities 7,240 5,204 3,235
Repairs and maintenance 8,381 5,443 3,073
Management fees 2,975 2,255 540
--------- --------- --------
Total unallocated operating expenses 54,120 34,693 17,588
--------- --------- --------
Gross profit 95,164 63,962 30,828
Insurance (955) (779) (379)
Lessee overhead (2,364) (2,210) (2,273)
Percentage Lease expense (87,735) (57,486) (27,466)
--------- --------- --------
Net income 4,110 3,487 710
Other comprehensive income -
unrealized gains (losses)
on marketable securities (536) 204 358
--------- --------- --------
Comprehensive income $ 3,574 $ 3,691 $ 1,068
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
35
<PAGE> 38
INNKEEPERS HOSPITALITY
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1998, 1997 and 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
Common Shares Gain On Retained Total
------------------ Marketable Earnings Shareholders'
Shares Par Value Securities (Deficit) Equity
------ --------- ---------- --------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 2,000 $ 2 $ 2
Issuance of common shares 1,000 1 1
Net income $ 710 710
Change in unrealized gain on marketable
securities $ 358 358
Distributions paid (771) (771)
--------- ---------- ------- ------ ---------
Balance at December 31, 1996 3,000 3 358 (61) 300
Net income 3,487 3,487
Change in unrealized gain on marketable
securities 204 204
Distributions paid (2,226) (2,226)
--------- ---------- ------- ------ -------
Balance at December 31, 1997 3,000 3 562 1,200 1,765
Issuance of common shares 4,000 4 4
Net income 4,110 4,110
Change in unrealized gain on
marketable securities (536) (536)
Distributions paid (5,104) (5,104)
------- -------- ------- ------ --------
Balance at December 31, 1998 7,000 $ 7 $ 26 $ 206 $ 239
======= ======== ======= ====== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
36
<PAGE> 39
INNKEEPERS HOSPITALITY
COMBINED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,110 $ 3,487 $ 710
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 44 45 28
Changes in operating assets and liabilities:
Accounts receivable (1,294) (697) (853)
Inventory 23 44 (40)
Prepaid expenses (92) (118) (14)
Other assets 33 (45)
Accounts payable 1,078 911 127
Accrued expenses 1,411 510 483
Payable to Manager 417 391 1,634
Other liabilities 160 (200) 785
Due to Partnership 6,091 250 1,493
-------- ------- -------
Net cash provided by operating activities 11,948 4,656 4,308
-------- ------- -------
Cash flows from investing activities:
Advances to affiliates (298)
Affiliate advances collected 298
Purchase of equipment (22) (6) (81)
Purchase of marketable securities, net (1,127) (410) (548)
-------- ------- -------
Net cash used in investing activities (1,149) (118) (927)
-------- ------- -------
Cash flows from financing activities:
Distributions paid (5,104) (2,226) (771)
Advances (payments) to shareholders 40
Issuance of common shares 4 1
-------- ------- -------
Net cash used in financing activities (5,100) (2,226) (730)
-------- ------- -------
Net increase in cash and cash equivalents 5,699 2,312 2,651
Cash and cash equivalents at beginning of year 7,863 5,551 2,900
-------- ------- -------
Cash and cash equivalents at end of year $ 13,562 $ 7,863 $ 5,551
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
37
<PAGE> 40
INNKEEPERS HOSPITALITY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Innkeepers Hospitality, Inc. and other entities with identical ownership,
formerly known as JF Hotel, Inc. (collectively "IH" or the "IH Lessee") are
under common control and were formed primarily to lease and operate hotels owned
by Innkeepers USA Trust ("Innkeepers") through Innkeepers USA Limited
Partnership and its subsidiaries (collectively the "Partnership," and together
with Innkeepers, the "Company"). As of December 31, 1998, approximately 95.7% of
the Partnership was owned by the Company. The principal shareholders of the IH
Lessee are Jeffrey H. Fisher, who is the President, Chief Executive Officer and
Chairman of Innkeepers, and Frederic M. Shaw, who is the Executive
Vice-President and Chief Operating Officer of Innkeepers. The IH Lessee
commenced the leasing and operation of seven hotels (the "Initial Hotels") on
September 30, 1994 and at December 31, 1998 leased 56 hotels (the "IH Leased
Hotels") from the Company.
The Lessee operates 31 of the Hotels, Residence Inn by Marriott, Inc. ("RIBM", a
wholly-owned subsidiary of Marriott International, Inc.) operates 23 of the
Hotels, and an unaffiliated party operates two of the Hotels.
CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents. Cash equivalents are placed
with reputable institutions and the balances may at times exceed federal
depository insurance limits.
The carrying amount of cash and cash equivalents approximates fair value.
MARKETABLE SECURITIES
Marketable securities, which primarily consist of 157,850 and 113,950 common
shares of Innkeepers at December 31, 1998 and 1997, respectively, are classified
as available for sale and are carried at market value. Marketable securities
also include 20,500 preferred shares of the Company at December 31, 1998, which
are convertible at any time into 30,363 common shares. The appreciation in value
of the marketable securities, since purchase, is recorded in shareholders'
equity until realized.
INVENTORY
Inventory, consisting of food and beverage, is stated at the lower of cost
(generally, first-in, first-out) or market. Linens and uniforms are expensed as
incurred.
PREPAID EXPENSES
Prepaid expenses consist primarily of prepaid insurance.
REVENUE RECOGNITION
Revenue is recognized as earned. Credit evaluations are performed and an
allowance for doubtful accounts is provided against accounts receivable which
are estimated to be uncollectible.
FRANCHISE FEES
The cost of obtaining franchise licenses, for hotels subject to such licenses,
is paid by the Company, and the continuing franchise fees (generally a
percentage of room revenue) are paid by the IH Lessee.
38
<PAGE> 41
INNKEEPERS HOSPITALITY
NOTES TO COMBINED FINANCIAL STATEMENTS
ADVERTISING COSTS
Advertising costs are expensed as incurred. Included in franchise and marketing
fees are fees (generally a percentage of room revenue) payable to marketing
funds of the franchisors which were $4,942,000, $3,303,000, and $1,728,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
PERCENTAGE LEASE EXPENSE
Each IH Leased Hotel is leased by the Company to the IH Lessee under a
percentage lease agreement ("Percentage Lease"). The Percentage Lease for each
IH Leased Hotel provides for the payment to the Company of monthly percentage
rent based on fixed percentages of gross room revenue in excess of certain
specified levels. The Percentage Lease for each IH Leased Hotel provides for
minimum base rents in the event that percentage rents do not exceed base rents.
Percentage Lease expense is recognized as due to the Company under the
Percentage Leases from lease inception.
INCOME TAXES
The IH Lessee has elected S corporation status under the Internal Revenue Code.
Accordingly, the shareholders of the IH Lessee are taxed on an individual basis
on their proportionate share of the IH Lessee's taxable income. Consequently, no
provision for income taxes has been reflected in the financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. SHARE APPRECIATION RIGHTS
In 1994, the IH Lessee granted to certain officers an aggregate of 70,000 share
appreciation rights ("SARs") based on the performance of the Company's common
shares. The SARs vest over a four year period, have been granted at an exercise
price of $10.00 and have a maximum term of ten years. In 1997, the IH Lessee
granted to certain employees and officers an aggregate of 300,000 SARs, which
vest over four or five year periods, have an exercise price of $13.25 and a
maximum term of ten years. No SARs have been exercised as of December 31, 1998.
For the years ended December 31, 1997 and 1996, the IH Lessee has recognized
$196,000 and $234,000, respectively, in compensation cost related to the SARs
and, for the year ended December 31, 1998, the IH Lessee recognized $303,000 in
income related to the SARs, which is included in Lessee Overhead in the
accompanying combined statements of income.
3. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The IH Lessee has future lease commitments for office space through 2001.
Minimum future rental payments under those noncancelable operating leases is
approximately $350,000 per year.
Rent expense, excluding Percentage Lease expense, was $178,000, $135,000, and
$219,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The IH Lessee has future minimum base lease commitments under the Percentage
Lease agreements to the Company through 2012. Minimum future base lease payments
under the Percentage Lease agreements are as follows (in thousands):
39
<PAGE> 42
INNKEEPERS HOSPITALITY
NOTES TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1999 $ 50,534
2000 50,534
2001 50,534
2002 50,534
2003 50,534
Thereafter 252,018
--------
$504,688
========
</TABLE>
The IH Lessee paid base rents of $43,318,000, $25,580,000, and $10,212,000, and
percentage rent, in excess of base rents, of $44,417,000, $31,906,000, and
$17,254,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
RIBM operates 23 of the IH Leased Hotels under management agreements with the IH
Lessee (the "RIBM Management Agreements"). The RIBM Management Agreements,
generally, have an initial term of 13 years and provide for a base fee of 2% of
gross revenues at the RIBM managed hotels and an incentive fee which is 50% of
available cash flow, as defined in the RIBM Management Agreements. For seven of
the IH Leased Hotels, the RIBM Management Agreements provide for an incentive
fee of 65% of available cash flow up to 3.5% of gross revenue and 50% of
available cash flow thereafter. The payment of incentive fees is subordinate to
the IH Lessee's obligations under the Percentage Leases at the RIBM managed
hotels. The RIBM Management Agreements also contain substantial penalties for
early termination without cause. Amounts due to RIBM under the RIBM Management
Agreements are included in "Payable to Manager" in the accompanying combined
balance sheets. The right to operate the 23 hotels as Residence Inn by Marriott
hotels is contained in the RIBM Management Agreements. In lieu of a franchise
fee, the RIBM Management Agreements provide for a system fee of 5% of gross
revenues at the RIBM managed hotels. The system fee is included in "Franchise
Fees" in the accompanying combined statements of income.
Two of the IH Leased Hotels are operated under management agreements with an
unaffiliated party with remaining terms of approximately three years and
providing for a base fee of 2% of gross revenues and an incentive fee based on
the performance of the hotels managed.
The Company has reimbursed the IH Lessee $100,000 for the use of office
facilities for each of the years ended December 31, 1998, 1997 and 1996,
respectively. The Company has advanced to the IH Lessee the working capital
deposit required under the RIBM Management Agreements. These advances are
included in other long-term liabilities in the accompanying combined balance
sheets. Percentage Lease expense due to the Company, which remains unpaid at
December 31, 1998 and 1997, is included in Due to Partnership in the
accompanying combined balance sheets. The Company has also guaranteed certain of
the IH Lessee's obligations under its franchise licenses (and is secondarily
liable for certain of the IH Lessee's obligations under the Marriott Management
Agreements), generally in exchange for certain rights to substitute a
replacement lessee as the franchisee (or as the party to the RIBM Management
Agreement) if the Company terminates the related Percentage Lease.
40
<PAGE> 43
INNKEEPERS HOSPITALITY
NOTES TO COMBINED FINANCIAL STATEMENTS
4. EMPLOYEE BENEFIT PLAN
The IH Lessee sponsors a defined contribution employee benefit plan (the
"Plan"). Substantially all employees who are age 21 or older and have at least
one year of service, as defined, are eligible to participate in the Plan.
Employees may contribute up to 15% of their compensation to the Plan, subject to
certain annual limitations. The IH Lessee currently does not contribute to the
Plan, however, the IH Lessee absorbs certain administrative expenses of the
Plan.
On October 1, 1997, the IH Lessee established a self-insured health plan for its
employees. The IH Lessee has made a provision for reported and unreported claims
incurred as of December 31, 1998 and 1997. The IH Lessee also maintains
individual and aggregate stop loss policies.
5. SUBSEQUENT EVENTS
In January and March 1999, the Company acquired and leased three hotels to the
IH Lessee under Percentage Leases.
41
<PAGE> 44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders
Innkeepers USA Trust
Our audits of the consolidated financial statements referred to in our report
dated February 19, 1999 appearing on page 24 of the 1998 Annual Report to
Shareholders of Innkeepers USA Trust (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedule listed in Item 14(a)
of this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
February 19, 1999
42
<PAGE> 45
INNKEEPERS USA TRUST
SCHEDULE 3 - REAL ESTATE AND ACCUMULATED DEPRECIATION
at December 31, 1998
<TABLE>
<CAPTION>
Cost Capitalized Gross Amounts of Which
Initial Cost Subsequent to Acquisition Carried at Close of Period
- ----------------------------------------------------------------------------------------------------------------------------------
Buildings and Buildings and Buildings and
Description Encumbrances Land Improvement Land Improvement Land Improvement
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Residence Inn:
Addison, TX $ 1,000,000 $ 11,914,340 $ 0 $ 0 $ 1,000,000 $ 11,914,340
Altamonte Springs, FL 1,329,300 7,089,660 0 0 1,329,300 7,089,660
Arlington, TX 860,000 8,432,997 0 0 860,000 8,432,997
Atlanta (Downtown), GA 1,550,000 14,926,908 0 70,330 1,550,000 14,997,238
Atlanta, (Peachtree 947,880 9,082,820 0 0 947,880 9,082,820
Corners), GA
Bellevue, WA 5 3,115,050 16,933,855 0 0 3,115,050 16,933,855
Binghamton, NY 3 720,000 5,293,910 13,615 286,304 733,615 5,580,214
Bothell, WA 1,913,750 9,409,475 0 0 1,913,750 9,409,475
Cherry Hill, NJ 3 1,000,000 8,136,208 0 132,501 1,000,000 8,268,709
Columbus East, OH 724,800 3,881,101 0 0 724,800 3,881,101
Denver (Downtown), CO 3 1,210,000 8,005,615 101,500 726,225 1,311,500 8,731,840
Denver (South), CO 2 1,105,000 7,726,889 22,486 1,198,056 1,127,486 8,924,945
East Lansing, MI 385,000 3,878,273 0 4,604 385,000 3,882,877
Eden Prairie, MN 1,240,000 9,248,876 29,789 473,308 1,269,789 9,722,184
Fort Wayne, IN 751,650 4,018,300 0 0 751,650 4,018,300
Fremont, CA 2 1,000,000 4,684,094 1,572 293,458 1,001,572 4,977,552
Gaithersburg, MD 1,999,668 12,652,428 0 0 1,999,668 12,652,428
Grand Rapids, MI 770,000 6,455,475 54,662 534,519 824,662 6,989,994
Harrisburg, PA 770,000 5,746,456 7,869 305,401 777,869 6,051,857
Indianapolis, IN 789,150 4,213,628 0 0 789,150 4,213,628
Lexington, KY 1,069,350 5,712,665 0 0 1,069,350 5,712,665
Louisville, KY 1,509,600 8,046,326 0 0 1,509,600 8,046,326
Lynnwood, WA 5 2,295,000 12,473,812 0 0 2,295,000 12,473,812
Mountain View 2 3,700,000 12,297,251 11,540 379,972 3,711,540 12,677,223
(Palo Alto), CA
Ontario, CA 1,876,650 9,998,954 0 0 1,876,650 9,998,954
Portland, ME 520,000 4,996,765 0 300 520,000 4,997,065
Portland South, OR 5 1,929,750 10,275,467 0 0 1,929,750 10,275,467
Richmond, VA 2 600,000 5,159,238 25,948 97,676 625,948 5,256,914
San Jose, CA 2 1,350,000 5,819,759 39,782 239,242 1,389,782 6,059,001
San Jose South, CA 2,504,850 16,700,536 0 0 2,504,850 16,700,536
San Mateo, CA 4,600,000 15,191,926 91,223 845,558 4,691,223 16,037,484
Shelton, CT 1,560,000 8,175,272 19,715 629,321 1,579,715 8,804,593
Silicon Valley I, CA 3 6,330,000 23,301,035 92,860 1,678,078 6,422,860 24,979,113
Silicon Valley II, CA 1 5,450,000 29,054,525 145,549 1,077,797 5,595,549 30,132,322
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Life Upon
Which
Depreciation In
Accumulated Net Date of Date of Statement Is
Description Total Depreciation Book Value Construction Acquisition Computed
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Residence Inn:
Addison, TX $ 12,914,340 $ 521,019 $ 12,393,321 4/19/96 2/1/97 40
Altamonte Springs, FL 8,418,960 177,618 8,241,342 5/20/85 12/30/97 40
Arlington, TX 9,292,997 368,627 8,924,370 7/23/95 2/1/97 40
Atlanta (Downtown), GA 16,547,238 810,012 15,737,226 6/24/96 11/1/96 40
Atlanta, (Peachtree 10,030,700 58,075 9,972,625 7/14/98 10/9/98 40
Corners), GA
Bellevue, WA 20,048,905 434,300 19,614,605 5/1/84 1/14/98 40
Binghamton, NY 6,313,829 614,300 5,699,529 11/1/87 9/30/94 40
Bothell, WA 11,323,225 242,292 11,080,933 5/1/91 1/9/98 40
Cherry Hill, NJ 9,268,709 543,474 8,725,235 8/25/89 5/7/96 40
Columbus East, OH 4,605,901 98,861 4,507,040 6/2/86 12/30/97 40
Denver (Downtown), CO 10,043,340 448,324 9,595,016 6/1/82 11/1/96 40
Denver (South), CO 10,052,431 827,338 9,225,093 5/1/81 10/6/95 40
East Lansing, MI 4,267,877 208,048 4,059,829 10/19/84 11/1/96 40
Eden Prairie, MN 10,991,973 413,675 10,578,298 3/1/90 1/4/97 40
Fort Wayne, IN 4,769,950 102,291 4,667,659 12/14/85 12/30/97 40
Fremont, CA 5,979,124 452,129 5,526,995 5/1/85 10/6/95 40
Gaithersburg, MD 14,652,096 162,211 14,489,885 3/31/98 7/10/98 40
Grand Rapids, MI 7,814,656 362,721 7,451,935 1/1/84 11/1/96 40
Harrisburg, PA 6,829,726 383,802 6,445,924 9/22/88 5/7/96 40
Indianapolis, IN 5,002,778 107,014 4,895,764 8/1/84 12/30/97 40
Lexington, KY 6,782,015 144,490 6,637,525 11/1/85 12/30/97 40
Louisville, KY 9,555,926 202,832 9,353,094 3/1/84 12/30/97 40
Lynnwood, WA 14,768,812 319,841 14,448,971 5/1/87 1/14/98 40
Mountain View 16,388,763 1,072,527 15,316,236 10/1/85 10/6/95 40
(Palo Alto), CA
Ontario, CA 11,875,604 251,459 11,624,145 2/1/86 12/30/97 40
Portland, ME 5,517,065 270,657 5,246,408 3/8/96 11/1/96 40
Portland South, OR 12,205,217 263,474 11,941,743 12/1/84 1/14/98 40
Richmond, VA 5,882,862 444,326 5,438,536 11/1/85 10/6/95 40
San Jose, CA 7,448,783 527,106 6,921,677 3/1/86 10/6/95 40
San Jose South, CA 19,205,386 71,370 19,134,016 8/11/98 11/6/98 40
San Mateo, CA 20,728,707 916,560 19,812,147 9/1/85 11/1/96 40
Shelton, CT 10,384,308 248,980 10,135,328 8/1/88 10/31/97 40
Silicon Valley I, CA 31,401,973 1,358,175 30,043,798 10/3/83 11/1/96 40
Silicon Valley II, CA 35,727,871 1,488,425 34,239,446 5/15/85 11/1/96 40
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
Cost Capitalized Gross Amounts of Which
Initial Cost Subsequent to Acquisition Carried at Close of Period
- ----------------------------------------------------------------------------------------------------------------------------------
Buildings and Buildings and Buildings and
Description Encumbrances Land Improvement Land Improvement Land Improvement
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Troy (Central), MI 2 1,290,000 4,905,564 115,024 649,318 1,405,024 5,554,882
Troy (Southeast), MI 2 760,000 7,257,010 63,480 360,309 823,480 7,617,319
Tukwila, WA 5 3,179,550 17,323,081 31,668 27,972 3,211,218 17,351,053
Vancouver, WA 5 2,080,650 11,320,793 0 0 2,080,650 11,320,793
Wichita East, KA 3 525,000 3,442,136 81,508 440,157 606,508 3,882,293
Windsor, CT 2 1,150,000 4,742,178 14,388 334,087 1,164,388 5,076,265
Winston-Salem, NC 874,500 4,664,541 0 0 874,500 4,664,541
Summerfield Suites:
Addison, TX 4 1,470,000 11,918,869 0 0 1,470,000 11,918,869
Belmont, CA 2,900,000 16,318,854 0 536 2,900,000 16,319,390
El Segundo 4 1,970,000 11,395,769 4,636 0 1,974,636 11,395,769
Las Colinas, TX 2,263,000 15,582,009 0 600 2,263,000 15,582,609
Mount Laurel, NJ 4 400,000 11,200,995 0 1,310 400,000 11,202,305
West Hollywood, CA 969,000 12,689,650 0 0 969,000 12,689,650
Hampton Inn:
Albany/Latham, NY 4 850,000 7,978,826 5,775 259,553 855,775 8,238,379
Germantown, MD 920,000 4,942,875 0 1,875,141 920,000 6,818,016
Islandia (Long Island), NY 3 920,000 4,873,128 41,473 491,738 961,473 5,364,866
Lombard, IL 4 600,000 6,602,047 55,016 521,038 655,016 7,123,085
Naples, FL 3 690,000 4,777,891 26,057 577,292 716,057 5,355,183
Norcross, GA 1,200,000 7,711,883 0 24,977 1,200,000 7,736,860
Schaumburg, IL 4 572,000 4,211,770 11,613 464,901 583,613 4,676,671
Tallahassee, FL 3 500,000 4,253,650 27,494 58,213 527,494 4,311,863
West Palm Beach, FL 1 0 3,954,039 32,372 544,208 32,372 4,498,247
Westchester, IL 4 572,000 4,641,850 6,918 325,209 578,918 4,967,059
Willow Grove 1,110,000 8,376,545 0 169,053 1,110,000 8,545,598
(Philadelphia), PA
Woburn, MA 0 2,731,793 3,208 3,121,101 3,208 5,852,894
SunriseSuites:
Tinton Falls, NJ 750,000 4,625,441 0 891 750,000 4,626,332
Comfort Inn:
Allentown, PA 715,000 6,062,294 0 309,868 715,000 6,372,162
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Life Upon
Which
Depreciation In
Accumulated Net Date of Date of Statement Is
Description Total Depreciation Book Value Construction Acquisition Computed
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Troy (Central), MI 6,959,906 557,540 6,402,366 10/1/85 10/6/95 40
Troy (Southeast), MI 8,440,799 689,135 7,751,664 10/1/85 10/6/95 40
Tukwila, WA 20,562,271 444,317 20,117,954 8/1/85 1/14/98 40
Vancouver, WA 13,401,443 290,277 13,111,166 3/1/87 1/14/98 40
Wichita East, KA 4,488,801 237,850 4,250,951 3/1/81 11/1/96 40
Windsor, CT 6,240,653 470,050 5,770,603 9/1/86 10/6/95 40
Winston-Salem, NC 5,539,041 118,215 5,420,826 2/15/86 12/30/97 40
Summerfield Suites:
Addison, TX 13,388,869 446,242 12,942,627 2/19/96 6/20/97 40
Belmont, CA 19,219,390 611,428 18,607,962 10/23/95 6/20/97 40
El Segundo 13,370,405 426,999 12,943,406 3/6/95 6/20/97 40
Las Colinas, TX 17,845,609 587,680 17,257,929 2/21/96 6/20/97 40
Mount Laurel, NJ 11,602,305 419,741 11,182,564 8/18/96 6/20/97 40
West Hollywood, CA 13,658,650 475,139 13,183,511 6/17/93 6/20/97 40
Hampton Inn:
Albany/Latham, NY 9,094,154 973,103 8,121,051 12/28/90 9/30/94 40
Germantown, MD 7,738,016 1,472,420 6,265,596 1/11/96 5/22/95 40
Islandia (Long Island), NY 6,326,339 745,853 5,580,486 7/26/88 9/30/94 40
Lombard, IL 7,778,101 295,892 7,482,209 9/16/87 6/26/97 40
Naples, FL 6,071,240 660,722 5,410,518 11/19/90 9/30/94 40
Norcross, GA 8,936,860 421,774 8,515,086 8/6/96 11/1/96 40
Schaumburg, IL 5,260,284 205,587 5,054,697 12/9/86 6/26/97 40
Tallahassee, FL 4,839,357 401,572 4,437,785 4/5/93 1/31/95 40
West Palm Beach, FL 4,530,619 1,457,295 3,073,324 7/1/86 9/30/94 40
Westchester, IL 5,545,977 215,257 5,330,720 6/13/88 6/26/97 40
Willow Grove 9,655,598 1,405,353 8,250,245 8/8/91 9/30/94 40
(Philadelphia), PA
Woburn, MA 5,856,102 1,076,122 4,779,980 5/6/97 8/9/96 40
Sunrise Suites:
Tinton Falls, NJ 5,376,332 173,230 5,203,102 10/19/93 6/20/97 40
Comfort Inn:
Allentown, PA 7,087,162 630,625 6,456,537 1989 3/29/95 40
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
Cost Capitalized Gross Amounts of Which
Initial Cost Subsequent to Acquisition Carried at Close of Period
- ----------------------------------------------------------------------------------------------------------------------------------
Buildings and Buildings and Buildings and
Description Encumbrances Land Improvement Land Improvement Land Improvement
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Holiday Inn Express:
Lexington, MA 4 875,000 5,557,111 39,781 2,947,692 914,781 8,504,803
Courtyard by
Marriott:
Fort Lauderdale, FL 0 7,821,833 1,710 436,503 1,710 8,258,336
Vacant land 300,000 0 363 0 300,363 0
Corporate 0 0 0 112,260 0 112,260
------------ ------------ ----------- ----------- ------------ ------------
$ 88,882,148 $550,819,264 $ 1,220,594 $23,026,577 $ 90,102,742 $573,845,841
------------ ------------ ----------- ----------- ------------ ------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Life Upon
Which
Depreciation In
Accumulated Net Date of Date of Statement Is
Description Total Depreciation Book Value Construction Acquisition Computed
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Holiday Inn Express:
Lexington, MA 9,419,584 1,227,071 8,192,513 1971 2/2/96 40
Courtyard by
Marriott:
Fort Lauderdale, FL 8,260,046 2,074,050 6,185,996 1988 9/30/94 40
Vacant land 300,363 0 300,363 N/A 1997 N/A
Corporate 112,260 9,181 103,079 N/A N/A 40
------------ ------------ ------------
$663,948,583 $ 34,136,073 $629,812,510
------------ ------------ ------------
</TABLE>
Notes:
1. Collateral for various mortgage notes.
2. Collateral for the $30 million First Term Loan.
3. Collateral for the$42 million Second Term Loan.
4. Collateral for the $40 million Third Term Loan.
5. Collateral for Interim Loan # 2.
<TABLE>
<CAPTION>
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Balance of land, buildings and improvements at beginning of year $521,321,121 $293,975,670 $130,170,791
Additions to land, buildings and improvements 160,588,876 $227,345,451 $163,804,879
Disposals of land, buildings and improvements 17,961,414 -- --
------------ ------------ ------------
Balance of land, buildings and improvements at end of year $663,948,583 $521,321,121 $293,975,670
============ ============ ============
</TABLE>
45
<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference from the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year covered by this Form 10-K with respect to its Annual Meeting
of Shareholders to be held on May 5, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year covered by this Form 10-K with respect to its Annual Meeting
of Shareholders to be held on May 5, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year covered by this Form 10-K with respect to its Annual Meeting
of Shareholders to be held on May 5, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year covered by this Form 10-K with respect to its Annual Meeting
of Shareholders to be held on May 5, 1999.
46
<PAGE> 49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES
AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
The following Financial Statements are incorporated by reference from
the Financial Statements included in the Company's 1998 Annual Report, which
statements are filed in Exhibit 13.1 to this Form 10-K.
INNKEEPERS USA TRUST
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1998
and 1997
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
The following Financial Statements are included in this report on the pages
indicated.
INNKEEPERS HOSPITALITY
<TABLE>
<S> <C>
Report of Independent Accountants...........................................................................33
Combined Balance Sheets at December 31, 1998 and 1997 ......................................................34
Combined Statements of Income for the years ended
December 31, 1998, 1997 and 1996 .........................................................................35
Combined Statement of Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996....................................................................36
Combined Statement of Cash Flows for the years ended
December 31, 1998, 1997 and 1996..........................................................................37
Notes to Combined Financial Statements......................................................................38
FINANCIAL STATEMENT SCHEDULE OF INNKEEPERS USA TRUST
Report of Independent Accountants...........................................................................42
Schedule 3 - Real Estate and Accumulated Depreciation
at December 31, 1998......................................................................................43
</TABLE>
47
<PAGE> 50
All other schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the consolidated financial
statements and notes thereto.
With the exception of the consolidated financial statements and the accountants'
reports thereon listed in the above index, the information referred to in Items
1, 5, 6 and 7 and the supplementary quarterly financial information referred to
in Item 8, all of which is included in the 1998 Annual Report to Shareholders of
Innkeepers USA Trust and incorporated by reference into this Form 10- K Annual
Report, the 1998 Annual Report to Shareholders is not to be deemed "filed" as
part of this report.
(b) REPORTS ON FORM 8-K
None.
48
<PAGE> 51
(c) EXHIBITS
LIST OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
3.1 Amended and Restated Declaration of Trust of the Registrant
(previously filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-11, Registration No. 33-81362 and
incorporated herein by reference).
3.2 Bylaws of the Registrant (previously filed as Exhibit 3.2 to
the Company's Registration Statement on Form S-11,
Registration No. 33-81362 and incorporated herein by
reference).
4.1 Form of Common Share Certificate (previously filed as Exhibit
4.1 to the Company's Registration Statement on Form S-11,
Registration No. 33-81362 and incorporated herein by
reference).
10.1 Second Amended and Restated Agreement of Limited Partnership
of Innkeepers USA Limited Partnership (previously filed as
Exhibit 10.1-A to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996).
10.2 Form of Percentage Lease (previously filed as Exhibit 10.11 to
the Company's Registration Statement on Form S-11,
Registration No. 33-81362 and incorporated herein by
reference).
10.3 Form of Right of First Refusal and Option to Purchase
(previously filed as Exhibit 10.12 to the Company's
Registration Statement on Form S-11, Registration No. 33-
81362 and incorporated herein by reference).
10.4 Innkeepers USA Trust 1994 Share Incentive Plan (previously
filed as Exhibit 10.4 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997).
10.5 Innkeepers USA Trust Non-Employee Trustees' Share Option Plan
(previously filed as Exhibit 10.5 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997).
10.6 Form of Employment Agreement (previously filed as Exhibit
10.16 to the Company's Registration Statement on Form S-11,
Registration No. 33-81362 and incorporated herein by
reference).
49
<PAGE> 52
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
10.7 Form of Exclusive Hotel Development Agreement and Covenant Not
to Compete (previously filed as Exhibit 10.17 to the Company's
Registration Statement on Form S-11, Registration No. 33-81362
and incorporated herein by reference).
10.8 Percentage Lease Agreement between Innkeepers USA Limited
Partnership and JF Hotel, Inc. for the Hampton Inn - West Palm
Beach, Florida (previously filed as Exhibit 10.4 to the
Company's registration statement on Form S-11, Registration
No. 33-95622 and incorporated herein by reference).
10.9 Consolidated Percentage Lease Agreement between Innkeepers USA
Limited Partnership and JF Hotel, Inc. for certain hotels
(previously filed as Exhibit 10.5 to the Company's
registration statement on Form S-11, Registration No. 33-95622
and incorporated herein by reference).
10.10 Credit Agreement, dated as of February 17, 1998, among
Innkeepers USA Trust, Innkeepers USA Limited Partnership,
Nationsbanc, N.A., Nomura Asset Capital Corporation and the
lenders named therein (previously filed as Exhibit 10.10 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.11 Employment Agreement between David Bulger and the Company
(previously filed as Exhibit 10.10 to the Company's
registration statement on Form S-11, Registration No. 33-95622
and incorporated herein by reference).
10.12 Seven Contribution Agreements, each dated as of September 16,
1996, between various partnerships and Innkeepers USA Limited
Partnership for the seven DeBoer Hotels (previously filed as
Exhibits 2.1 - 2.7 to the Company's Form 8-K filed on November
22, 1996 and incorporated herein by reference).
10.13 Form of Contribution Agreement between a partnership
subsidiary of Innkeepers USA Trust and a Summerfield
partnership (previously filed as Exhibit 10.1 to the Company's
Form 8-K filed on July 18, 1997 and incorporated herein by
reference).
10.14 Form of percentage lease agreement for Summerfield acquisition
hotels (previously filed as Exhibit 10.2 to the Company's Form
8-K filed on July 18, 1997 and incorporated herein by
reference).
10.15 Agreement on Franchise-Related matters between the Innkeepers
acquisition partnership, Innkeepers USA Limited Partnership
and Summerfield Suites Management Company, L.P., dated as of
June 20, 1997 (previously filed as Exhibit 10.3 to the
Company's Form 8-K filed on July 18, 1997 and incorporated
herein by reference).
50
<PAGE> 53
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
10.16 Lease Master Agreement between the Innkeepers acquisition
partnerships, Innkeepers USA Limited Partnership and
Summerfield Suites Lease Company, L.P., dated as of June 20,
1997 (previously filed as Exhibit 10.4 to the Company's Form
8-K filed on July 18, 1997 and incorporated herein by
reference).
10.17 Voting Agreement among Jeffrey H. Fisher, Innkeepers USA
Trust, Innkeepers USA Limited Partnership, the Summerfield
Contributing partnerships, and the beneficial holders of
Summerfield Units, dated June 20, 1997 (previously filed as
Exhibit 10.5 to the Company's Form 8-K filed on July 18, 1997
and incorporated herein by reference).
10.18 Redemption and Registration Rights Agreement between
Innkeepers USA Trust, Innkeepers USA Limited Partnership, the
Summerfield Contributing Partnerships and the beneficial
holders or the Summerfield Units dated as of June 20, 1997
(previously filed as Exhibit 10.6 to the Company's Form 8-K
filed on July 18, 1997 and incorporated herein by reference).
13.1 Sections of the 1998 Annual Report to Shareholders
incorporated by reference herein.
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule (for SEC use only)
(d) FINANCIAL STATEMENT SCHEDULE OF INNKEEPERS USA TRUST
Schedule 3 - Real Estate and Accumulated Depreciation at
December 31, 1998.
51
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
INNKEEPERS USA TRUST
March 22, 1999 /s/ Jeffrey H. Fisher
---------------------------------------
Chairman of the Board and President
March 22, 1999 /s/ David Bulger
--------------------------------------
Chief Financial Officer and Treasurer
(Principal Financial Officer)
March 22, 1999 /s/ Gregory M. Fay
---------------------------------------
Vice-President of Accounting
(Principal Accounting Officer)
52
<PAGE> 55
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Jeffrey H. Fisher Chairman of the Board, March 22, 1999
- -------------------------------------- Chief Executive Officer and
Jeffrey H. Fisher President (Principal
Executive Officer)
/s/ Miles Berger Trustee March 22, 1999
- --------------------------------------
Miles Berger
/s/ C. Gerald Goldsmith Trustee March 22, 1999
- --------------------------------------
C. Gerald Goldsmith
/s/ Bruce Zenkel Trustee March 22, 1999
- --------------------------------------
Bruce Zenkel
/s/ Jack P. DeBoer Trustee March 22, 1999
- --------------------------------------
Jack P. DeBoer
/s/ Thomas Crocker Trustee March 22, 1999
- --------------------------------------
Thomas Crocker
/s/ David Bulger Chief Financial Officer and March 22, 1999
- -------------------------------------- Treasurer
David Bulger (Principal Financial Officer)
/s/ Gregory M. Fay Vice President of March 22, 1999
- ------------------------------------- Accounting (Principal
Gregory M. Fay Accounting Officer)
/s/ Rolf E. Ruhfus Trustee March 22, 1999
- --------------------------------------
Rolf E. Ruhfus
</TABLE>
53
<PAGE> 56
LIST OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
3.1 Amended and Restated Declaration of Trust of the Registrant
(previously filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-11, Registration No. 33-81362 and
incorporated herein by reference).
3.2 Bylaws of the Registrant (previously filed as Exhibit 3.2 to
the Company's Registration Statement on Form S-11,
Registration No. 33-81362 and incorporated herein by
reference).
4.1 Form of Common Share Certificate (previously filed as Exhibit
4.1 to the Company's Registration Statement on Form S-11,
Registration No. 33-81362 and incorporated herein by
reference).
10.1 Second Amended and Restated Agreement of Limited Partnership
of Innkeepers USA Limited Partnership (previously filed as
Exhibit 10.1-A to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996).
10.2 Form of Percentage Lease (previously filed as Exhibit 10.11 to
the Company's Registration Statement on Form S-11,
Registration No. 33-81362 and incorporated herein by
reference).
10.3 Form of Right of First Refusal and Option to Purchase
(previously filed as Exhibit 10.12 to the Company's
Registration Statement on Form S-11, Registration No. 33-81362
and incorporated herein by reference).
10.4 Innkeepers USA Trust 1994 Share Incentive Plan (previously
filed as Exhibit 10.4 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997).
10.5 Innkeepers USA Trust Non-Employee Trustees' Share Option Plan
(previously filed as Exhibit 10.5 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997).
10.6 Form of Employment Agreement (previously filed as Exhibit
10.16 to the Company's Registration Statement on Form S-11,
Registration No. 33-81362 and incorporated herein by
reference).
10.7 Form of Exclusive Hotel Development Agreement and Covenant Not
to Compete (previously filed as Exhibit 10.17 to the Company's
Registration Statement on Form S-11, Registration No. 33-81362
and incorporated herein by reference).
<PAGE> 57
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
10.8 Percentage Lease Agreement between Innkeepers USA Limited
Partnership and JF Hotel, Inc. for the Hampton Inn - West Palm
Beach, Florida (previously filed as Exhibit 10.4 to the
Company's registration statement on Form S-11, Registration
No. 33-95622 and incorporated herein by reference).
10.9 Consolidated Percentage Lease Agreement between Innkeepers USA
Limited Partnership and JF Hotel, Inc. for certain hotels
(previously filed as Exhibit 10.5 to the Company's
registration statement on Form S-11, Registration No. 33-95622
and incorporated herein by reference).
10.10 Credit Agreement, dated as of February 17, 1998, among
Innkeepers USA Trust, Innkeepers USA Limited Partnership,
Nationsbanc, N.A., Nomura Asset Capital Corporation and the
lenders named therein (previously filed as Exhibit 10.10 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.11 Employment Agreement between David Bulger and the Company
(previously filed as Exhibit 10.10 to the Company's
registration statement on Form S-11, Registration No. 33-95622
and incorporated herein by reference).
10.12 Seven Contribution Agreements, each dated as of September 16,
1996, between various partnerships and Innkeepers USA Limited
Partnership for the seven DeBoer Hotels (previously filed as
Exhibits 2.1 - 2.7 to the Company's Form 8-K filed on
November 22, 1996 and incorporated herein by reference).
10.13 Form of Contribution Agreement between a partnership
subsidiary of Innkeepers USA Trust and a Summerfield
partnership (previously filed as Exhibit 10.1 to the Company's
Form 8-K filed on July 18, 1997 and incorporated herein by
reference).
10.14 Form of percentage lease agreement for Summerfield acquisition
hotels (previously filed as Exhibit 10.2 to the Company's Form
8-K filed on July 18, 1997 and incorporated herein by
reference).
10.15 Agreement on Franchise-Related matters between the Innkeepers
acquisition partnership, Innkeepers USA Limited Partnership
and Summerfield Suites Management Company, L.P., dated as of
June 20, 1997 (previously filed as Exhibit 10.3 to the
Company's Form 8-K filed on July 18, 1997 and incorporated
herein by reference).
<PAGE> 58
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
10.16 Lease Master Agreement between the Innkeepers acquisition
partnerships, Innkeepers USA Limited Partnership and
Summerfield Suites Lease Company, L.P., dated as of June 20,
1997 (previously filed as Exhibit 10.4 to the Company's Form
8-K filed on July 18, 1997 and incorporated herein by
reference).
10.17 Voting Agreement among Jeffrey H. Fisher, Innkeepers USA
Trust, Innkeepers USA Limited Partnership, the Summerfield
Contributing partnerships, and the beneficial holders of
Summerfield Units, dated June 20, 1997 (previously filed as
Exhibit 10.5 to the Company's Form 8-K filed on July 18, 1997
and incorporated herein by reference).
10.18 Redemption and Registration Rights Agreement between
Innkeepers USA Trust, Innkeepers USA Limited Partnership, the
Summerfield Contributing Partnerships and the beneficial
holders or the Summerfield Units dated as of June 20, 1997
(previously filed as Exhibit 10.6 to the Company's Form 8-K
filed on July 18, 1997 and incorporated herein by reference).
13.1 Sections of the 1998 Annual Report to Shareholders
incorporated by reference herein.
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP
<PAGE> 1
EXHIBIT 13.1
Selected Financial Data
<TABLE>
<CAPTION>
Period from
September 30,
1994
(Inception)
Years ended December 31, through
(unaudited) -------------------------------------------------------- December 31,
(in thousands, except per share data) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenue $ 103,767 $ 66,813 $ 28,377 $ 11,465 $ 1,519
Income before minority interest and
other nonrecurring items 42,113 29,213 9,749 3,864 420
Minority interest, common (1,829) (1,879) (531) (397) (52)
Minority interest, preferred (4,693) (4,551) (729) -- --
Gain on sale of hotels, net 333 -- -- -- --
Extraordinary loss (2,760) -- -- -- --
Net income 33,164 22,783 8,489 3,467 368
Basic earnings per share (1) 0.89 0.85 0.66 0.57 0.08
Diluted earnings per share (1) 0.88 0.85 0.66 0.57 0.08
OTHER DATA:
Funds from operations ("FFO") (2) $ 72,968 $ 47,518 $ 17,170 $ 7,015 $ 900
FFO per share (2) 1.65 1.43 1.20 1.03 0.17
Dividends per common share 1.12 1.02 0.90 0.84 0.19
Dividends per preferred share 1.50 -- -- -- --
Cash provided by operating activities 70,498 49,203 17,194 4,925 670
Cash used by investing activities (159,263) (246,744) (114,114) (90,929) (172)
Cash provided (used) by financing activities 87,179 161,430 135,166 86,642 (1,764)
<CAPTION>
Years ended December 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment in hotels, at cost $ 764,221 $ 601,508 $ 326,620 $146,524 $55,089
Total assets 725,114 592,607 360,357 143,339 50,247
Long-term debt 191,183 160,455 100,740 45,636 3,772
Minority interest in Partnership 59,802 74,552 45,880 6,124 5,462
Shareholder's equity 454,392 342,638 207,605 88,246 38,895
</TABLE>
(1) Before extraordinary loss in 1998
(2) See "Funds From Operations" in management's discussion and analysis of
financial condition and results of operations
Information for five hotels (which are considered to be the predecessor of the
Company) is presented below.
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
1994
- --------------------------------------------------------------------------------------------------------
<S> <C>
OPERATING DATA:
Total revenue $8,741
Hotel operating expenses 5,048
Depreciation and amortization 814
Interest expense 1,435
Other corporate expenses 948
- --------------------------------------------------------------------------------------------------------
Net income $ 496
========================================================================================================
</TABLE>
<PAGE> 2
QUARTERLY RESULTS OF OPERATIONS AND OTHER DATA
<TABLE>
<CAPTION>
(UNAUDITED) FIRST SECOND THIRD FOURTH
(IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
OPERATING DATA:
Total revenue (1) $23,856 $26,645 $29,232 $24,034 $103,767
Income before minority interest and
other nonrecurring items (1) 7,582 11,353 14,543 8,635 42,113
Net income (1) 3,357 9,455 12,740 7,612 33,164
Basic earnings per share (1)(2) 0.19 0.25 0.30 0.15 0.89
Diluted earnings per share (1)(2) 0.18 0.25 0.30 0.15 0.88
OTHER DATA:
FFO (3) $15,023 $18,979 $22,282 $16,684 $ 72,968
FFO per share (3) 0.37 0.44 0.48 0.36 1.65
- -----------------------------------------------------------------------------------------------------
1997
OPERATING DATA:
Total revenue $12,725 $15,144 $20,831 $18,113 $ 66,813
Income before minority interest 5,581 6,902 9,248 7,482 29,213
Net income 4,230 5,439 7,353 5,761 22,783
Basic earnings per share (4) 0.19 0.24 0.25 0.18 0.85
Diluted earnings per share (4) 0.19 0.24 0.25 0.17 0.85
OTHER DATA:
FFO (3) $ 8,798 $10,684 $14,856 $13,180 $ 47,518
FFO per share (3)(4) 0.32 0.38 0.41 0.33 1.43
- -----------------------------------------------------------------------------------------------------
1996
OPERATING DATA:
Total revenue $ 5,790 $ 6,507 $ 6,999 $ 9,081 $ 28,377
Income before minority interest 2,262 2,214 2,350 2,923 9,749
Net income 2,115 2,070 2,197 2,107 8,489
Basic earnings per share (4) 0.20 0.19 0.20 0.11 0.66
Diluted earnings per share (4) 0.20 0.19 0.20 0.11 0.66
OTHER DATA:
FFO (3) $ 3,717 $ 3,773 $ 4,080 $ 5,600 17,170
FFO per share (3) (4) 0.32 0.33 0.35 0.25 1.20
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) The quarterly information for 1998 is presented without regard to the
application of EITF 98-9.
(2) Before extraordinary loss.
(3) See "Funds From Operations" in management's discussion and analysis of
financial condition and results of operations.
(4) Due to the common share issuances in 1996 and 1997, the sum of the quarters
do not equal the weighted average for the year.
<PAGE> 3
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and related notes hereto.
General
The Notes to the Consolidated Financial Statements of Innkeepers USA
Trust included herein contains essential information relating to the Company and
the definitions of certain capitalized terms used herein. For additional
information relating to Innkeepers Hospitality, Inc. (formerly JF Hotel, Inc.),
reference is made to the Combined Financial Statements of Innkeepers
Hospitality, Inc. included in the Company's Annual Report on Form 10-K.
The Company acquired the following hotel properties during the years
ended December 31, 1997 and 1998.
<TABLE>
<CAPTION>
Number of Date Purchase
Hotel Suites/Rooms Acquired Price
<S> <C> <C> <C>
Residence Inn-Eden Prairie, MN 126 1/4/97 $11,250,000
Residence Inn-Addison, TX 150 2/1/97 $14,500,000
Residence Inn-Arlington, TX 114 2/1/97 $10,500,000
Summerfield Suites-Belmont, CA 132 6/20/97 (a)
Summerfield Suites -El Segundo, CA 122 6/20/97 (a)
Summerfield Suites-West Hollywood, CA 109 6/20/97 (a)
Summerfield Suites-Mount Laurel, NJ 116 6/20/97 (a)
Summerfield Suites-Addison, TX 132 6/20/97 (a)
Summerfield Suites-Irving (Las Colinas), TX 148 6/20/97 (a)
Sunrise Suites-Eatontown (Tinton Falls), NJ 96 6/20/97 (a)
Sierra Suites-Phoenix (Camelback), AZ (f) 113 6/20/97 (a)
Sierra Suites-Atlanta (Cumberland), GA (f) 89 6/20/97 (a)
Hampton Inn-Schaumburg (Chicago), IL 128 6/26/97 (b)
Hampton Inn-Westchester (Chicago), IL 112 6/26/97 (b)
Hampton Inn-Lombard (Chicago), IL 128 6/26/97 (b)
Residence Inn-Shelton, CT 96 10/31/97 $11,150,000
Residence Inn-Ontario, CA 200 12/30/97 (c)
Residence Inn-Altamonte Springs, FL 128 12/30/97 (c)
Residence Inn-Fort Wayne, IN 80 12/30/97 (c)
Residence Inn-Indianapolis, IN 88 12/30/97 (c)
Residence Inn-Lexington, KY 80 12/30/97 (c)
Residence Inn-Louisville, KY 96 12/30/97 (c)
Residence Inn-Columbus, OH 80 12/30/97 (c)
Residence Inn-Winston-Salem, NC 88 12/30/97 (c)
Residence Inn-Bothell, WA 120 1/9/98 $11,750,000
Residence Inn-Lynnwood, WA 120 1/14/98 (d)
Residence Inn-Vancouver, WA 120 1/14/98 (d)
Residence Inn-Bellevue, WA 120 1/14/98 (d)
Residence Inn-Tukwila, WA 144 1/14/98 (d)
Residence Inn-Lake Oswego, OR 112 1/14/98 (d)
Sierra Suites-Westborough, MA (f) 113 6/22/98 7,900,000
Residence Inn-Gaithersburg, MA 132 7/10/98 (e)
Residence Inn-Atlanta, GA 120 10/9/98 (e)
Residence Inn-San Jose, CA 150 11/6/98 (e)
</TABLE>
(a) Aggregate purchase price of $118,547,000
(b) Aggregate purchase price of $19,100,000
(c) Aggregate purchase price of $59,500,000
(d) Aggregate purchase price of $83,000,000
(e) Aggregate purchase price of $89,100,000, which includes three hotels that
had not been purchased as of December 31, 1998
(f) Hotel sold on October 23, 1998
The Hotels
The following chart summarizes information regarding the Hotels at
December 31, 1998:
<TABLE>
<CAPTION>
Number of Number of
Hotel Rooms/
Franchise Affiliation Properties Suites
- -------------------------------------------------------------------
<S> <C> <C>
Upscale, extended-stay hotels:
Residence Inn 41 4,787
Summerfield Suites 6 759*
Sunrise Suites 1 96
- -------------------------------------------------------------------
48 5,642
Limited service hotels:
Hampton Inn 12 1,527
Courtyard by Marriott 1 139
Comfort Inn 1 127
Holiday Inn Express 1 204
- -------------------------------------------------------------------
15 1,997
- -------------------------------------------------------------------
Total 63 7,639
===================================================================
</TABLE>
* includes 298 two-bedroom suites
Average daily rate ("ADR"), occupancy and revenue per available room ("RevPAR")
for 60 of the Hotels are presented in the following table. Results were excluded
for such comparison for three newly developed hotels. Management believes that
growth in RevPAR at the Hotels reflects the results of the Company's focused
acquisition strategy, the continued implementation of professional management
techniques by the Lessees and third party management companies employed by the
Lessees and improving industry conditions. No assurance can be given that the
trends reflected in following table will continue or that occupancy, ADR and
RevPAR will not decrease due to changes in national or local economic,
hospitality or other industry conditions.
<TABLE>
<CAPTION>
Years ended
December 31, Percentage
---------------------- increase
1998 1997 (decrease)
- --------------------------------------------------------------------------
<S> <C> <C> <C>
The Hotels (1):
Occupancy 79.78% 79.89% (0.1)%
Average daily rate $ 99.09 $ 92.57 7.0%
RevPAR $ 79.05 $ 73.96 6.9%
Upscale, extended-stay
hotels (2):
Occupancy 82.86% 83.89% (1.2)%
Average daily rate $106.18 $ 98.83 7.4%
RevPAR $ 87.99 $ 82.91 6.1%
Limited service hotels (3):
Occupancy 71.26% 68.87% 3.5%
Average daily rate $ 76.30 $ 71.49 6.7%
RevPAR $ 54.38 $ 49.23 10.5%
</TABLE>
(1) 60 hotels, excludes three newly developed hotels
(2) 45 hotels, excludes three newly developed hotels
(3) 15 hotels
<PAGE> 4
Results of operations
The following paragraphs discuss the results of operations for the
Company.
Comparison of the Year Ended December 31, 1998 ("1998") to the Year Ended
December 31, 1997 ("1997")
The Company had revenues for 1998 of $103,767,000, consisting of
$103,022,000 of Percentage Lease revenue from the Lessees and $745,000 of other
revenue, compared with $66,813,000, $65,433,000 and $1,380,000, respectively,
for 1997. The increase in Percentage Lease revenue is attributable to RevPAR
growth of approximately 6.9% at the Company's hotels and the number of hotels
owned increasing from 32 at January 1, 1997, to 56 at December 31, 1997 and 63
at December 31, 1998.
Depreciation, amortization of franchise costs, amortization of loan
origination fees, and amortization of unearned compensation ("Depreciation and
Amortization") were $32,519,000 in the aggregate for 1998 compared with
$19,951,000 for 1997. The increase in Depreciation and Amortization was
primarily due to the increase in the number of hotels owned as discussed
previously. Also contributing to the increase in Depreciation and Amortization
was the depreciation of renovations completed at the Hotels and amortization of
the restricted share awards granted in 1998.
Real estate and personal property taxes and property insurance were
$9,888,000 for 1998 compared with $5,645,000 for 1997. This increase was
primarily due to the increase in the number of hotels owned as discussed
previously and increases in assessed values of certain hotels for real estate
tax purposes.
Interest expense for 1998 was $15,149,000 compared with $9,255,000 for
1997. This increase is due primarily to increased borrowings for hotel
acquisitions offset by a reduction in the interest rate on the Company's Line of
Credit.
General and administrative expenses for 1998 were $3,645,000 compared
with $2,347,000 for 1997. This increase is due primarily to increases in certain
expenses as a result of the increase in the number of hotels owned and the
addition of new employees. However, general and administrative expenses remained
constant at approximately 3.5% of total revenue.
Net income applicable to common shareholders for 1998 was $26,980,000,
or $0.80 per diluted share, compared with $22,783,000, or $0.85 per diluted
share, for 1997. This decrease in earnings per diluted share was due primarily
to the extraordinary loss related to the extinguishment of the Company's
Previous Line of Credit.
Comparison of the Year Ended December 31, 1997 ("1997") to the Year Ended
December 31, 1996 ("1996")
The Company had revenues for 1997 of $66,813,000, consisting of
$65,433,000 of Percentage Lease revenue from the Lessees and $1,380,000 of other
revenue, compared with $28,377,000, $27,466,000 and $911,000, respectively, for
1996. The increase in Percentage Lease revenue is due, primarily, to the RevPAR
growth of 11.4% at the Company's Hotels and the number of hotels owned
increasing from 18 at January 1, 1996, to 32 at December 31, 1996 and to 56 at
December 13, 1997.
Depreciation and Amortization was $19,951,000 in the aggregate for 1997
compared with $8,424,000 for 1996. The increase in Depreciation and Amortization
was primarily due to the increase in the number of hotels owned as discussed
previously. Also contributing to the increase in Depreciation and Amortization
was the depreciation of renovations completed at the Hotels, amortization of
loan origination costs and fees for the Line of Credit, an interim loan and the
Second Term loan and amortization of the restricted share awards granted in
1997.
Real estate and personal property taxes and property insurance were
$5,645,000 for 1997 compared with $2,803,000 for 1996. This increase was
primarily due to the increase in the number of hotels owned as discussed
previously and increases in assessed values of certain hotels for real estate
tax purposes.
Interest expense for 1997 was $9,255,000 compared with $5,839,000 for
1996. Interest expense for 1997 consisted primarily of interest incurred on
borrowings outstanding under the Company's Line of Credit, the First Term Loan,
the Second Term Loan and borrowings under various mortgage notes. Interest
expense for 1996 consisted primarily of interest incurred on borrowings
outstanding under the Previous Line of Credit, the First Term Loan and
borrowings under a mortgage note.
General and administrative expenses for 1997 were $2,347,000 compared
with $1,186,000 for 1996. This increase is due primarily to increases in certain
expenses as a result of the increase in the number of hotels owned, the addition
of new employees and increases in the salaries of existing employees.
Net income for 1997 was $22,783,000, or $0.85 per share, compared with
$8,489,000, or $0.66 per share, for 1996.
Liquidity and Capital Resources
The Company's principal source of liquidity is rent payments from the
Lessees under the Percentage Leases, and the Company is dependent on the Lessees
to make such payments to provide cash for debt service, distributions, capital
expenditures at its Hotels, and working capital. The Company believes that its
cash provided by operating activities will be adequate to meet some of its
liquidity needs. The Company currently expects to fund its growth objectives,
and any other additional liquidity needs, primarily by borrowing on its Line of
Credit or other facilities, exchanging equity for hotel properties or possibly
accessing the capital markets if market conditions permit.
Cash and cash equivalents (including restricted cash and cash
equivalents) at December 31, 1998 and 1997 were $9,535,000 and $10,976,000,
including approximately $3,777,000 and $1,925,000, respectively, which the
Company is required, under the Percentage Leases, to make available to the
Lessees for the replacement and refurbishment of furniture and equipment and
certain other capital expenditures. Additionally, cash and cash equivalents
include approximately $3,116,000 and $4,823,000 at December 31, 1998 and 1997,
respectively, that is held in escrow to pay for insurance, taxes, and capital
expenditures for certain Hotels.
Net cash provided by operating activities for the years ended December
31, 1998 and 1997 was $70,498,000 and $49,203,000, respectively.
Net cash used in investing activities was $159,263,000 for the year
ended December 31, 1998. This was comprised primarily of the Company (a)
acquiring nine Residence Inn by Marriott hotels for approximately $142,450,000;
(b) costs incurred in the development of the Sierra Suites hotel located in
Westborough, Massachusetts of approximately $5,970,000; and (c) renovations at
certain hotels of approximately $26,900,000; offset by the sale of three Sierra
Suites hotels for approximately $19,950,000.
Net cash used in investing activities was $246,744,000 for the year
ended December 31, 1997. This was comprised primarily of the Company (a)
acquiring 12 Residence Inn hotels for approximately $101,974,000; (b) acquiring
three Hampton Inn hotels for approximately $19,100,000; (c) acquiring six
Summerfield Suites hotels, and two Sierra Suites hotels, and one Sunrise Suite
hotel for approximately $89,478,000.
<PAGE> 5
The purchase prices of certain hotels also included the issuance of Common Units
in addition to the cash portion described above.
Net cash provided by financing activities was $87,179,000 for the year
ended December 31, 1998, consisting primarily of net proceeds from the Series A
Preferred Share offering of $111,552,000, net proceeds from long-term debt
issuances of $30,728,000, distributions paid of $48,666,000, redemption of
233,612 Common Units for $3,568,000, and loan origination fees and costs paid of
$2,845,000.
Net cash provided by financing activities was $161,430,000 for the year
ended December 31, 1997 consisting primarily of net proceeds from the issuance
of 10,285,421 Common Shares for $135,305,000, borrowings under the Previous Line
of Credit of $60,300,000 and distributions paid of $29,860,000.
On May 18 and 27, 1998 the Company sold an aggregate of 4,630,000
8.625% Series A cumulative convertible preferred shares of beneficial interest
(the "Series A Preferred Shares") at $25 per share in a private offering (exempt
from registration under Rule 144A) underwritten by EVEREN Securities, Inc. The
total underwriting discount was $3,796,600. The Series A Preferred Shares are
convertible into 1.4811 common shares at any time. The Series A Preferred Shares
are redeemable by the Company after May 18, 2003 and have no stated maturity or
sinking fund requirements. The Series A Preferred Shares will automatically
convert into common shares in May 2008 unless previously converted or redeemed.
The Series A Preferred Shares have a liquidation preference of $25 per share and
are entitled to annual dividends equal to the greater of (i) $2.15624 per share
($0.53906 per share payable quarterly) or (ii) the cash dividend paid or payable
on the number of common shares into which a Series A Preferred Share is then
convertible. The net proceeds of the Series A Preferred Share offering of
$111,552,000 were used to repay borrowings outstanding under the Line of Credit.
On September 2, 1998, the SEC declared effective a registration statement
covering the resale of Series A Preferred Shares acquired in the 144A offering
or a subsequent exempt resale.
The Company pays regular quarterly distributions on its common shares
and Common Units and the current quarterly distribution is $0.28 per share.
Quarterly preferred distributions of $0.28875 are payable on each Class B
Preferred Unit. The holders of the Common Units and Class B Preferred Units may
redeem their units for cash or, at the election of Innkeepers, common shares on
a one-for-one basis. Under federal income tax law provisions applicable to
REITs, the Company is required to distribute at least 95% of its taxable income
to maintain its REIT status.
The Company's consolidated indebtedness was 25.0% of its investment in
hotels, at cost, at December 31, 1998. At December 31, 1998, the Company had
outstanding indebtedness of approximately $191,183,000, of which approximately
69.4% bore interest at a weighted average fixed rate of approximately 7.6%. At
December 31, 1998, 26 of the Company's hotel properties collateralized its
long-term debt and 37 of the Company's hotel properties were unencumbered. In
making future investments in hotel properties, the Company may incur additional
indebtedness. The Company may also incur indebtedness to meet distribution
requirements imposed on a REIT under the Internal Revenue Code to the extent
that working capital and cash flow from the Company's investments are
insufficient to make such distributions. The Company's Declaration of Trust
limits aggregate indebtedness to 50% of the Company's investment in hotel
properties, at cost, after giving effect to the Company's use of proceeds from
any indebtedness.
The Company's Line of Credit bears interest based on the LIBOR rate and
increases or decreases in the LIBOR rate will increase or decrease the Company's
cost of borrowings outstanding under the Line of Credit. Based on the borrowings
outstanding under the Line of Credit at December 31, 1998, a one percentage
point change in the LIBOR rate would change annual interest charges by
approximately $485,000. In March 1998, the Company entered into an interest rate
cap agreement with a notional amount of $125,000,000 and a term of one year. The
agreement effectively caps the interest rate on $125,000,000 of borrowings on
the Line of Credit at 7.625%.
In the future, the Company may seek to increase the amount of its
credit facilities, negotiate additional credit facilities, or issue corporate
debt instruments, all in compliance with the debt limitation. Any debt incurred
or issued by the Company may be secured or unsecured, short-term or long-term,
fixed or variable interest rate and may be subject to such other terms as
management or the Board of Trustees of the Company deems prudent.
The Company has a shelf registration statement for $250,000,000 of
common shares, preferred shares or warrants to purchase shares of the Company.
The shelf registration statement was declared effective by the Securities and
Exchange Commission on April 11, 1997. The terms and conditions of the
securities issued thereunder are determined by the Company based on market
conditions at the time of issuance. In July and August of 1997, the Company
issued 10,284,000 common shares, raising gross proceeds of $143,976,000 and
leaving $106,024,000 available under the shelf registration statement.
The Percentage Leases require the Company to make available to the
Lessees an amount equal to 4.0% of room revenues from the Hotels, on a monthly
basis, for the periodic replacement or refurbishment of furniture and equipment
and certain other capital expenditures at the Hotels. The Second and Third Term
Loans require that the Company make available for such purposes, at the Hotels
collateralizing those loans, an additional 1.0% (for a total of 5.0%) of room
revenues from such Hotels. The Company intends to cause the expenditure of
amounts in excess of such obligated amounts if necessary to comply with the
reasonable requirements of any franchise agreement and otherwise to the extent
that the Company deems such expenditures to be in the best interest of the
Company.
Management believes that the amounts required to be made available by
the Company will be sufficient to meet most of the routine expenditures for
furniture and equipment at the Hotels. However, the Company is currently in the
process of a capital improvement plan at the Hotels. In 1997 and 1998 the
Company spent approximately $57,000,000 in capital expenditures at the Hotels.
It is currently estimated that the Company will spend between $20,000,000 and
$25,000,000 in capital expenditures at the Hotels in 1999. The Company currently
intends to pay for the cost of capital improvements and any additional furniture
and equipment requirements from available cash or, to the extent that
undistributed cash is insufficient to pay such costs, the Line of Credit.
Management has become aware of certain financial difficulties at the
Summerfield Lessee. While the full extent of the financial difficulties of the
Summerfield Lessee is not known, management of the Company believes that near
term liquidity problems exist at the Summerfield Lessee. However, the
Summerfield Lessee has paid to the Company all amounts owed to the Company at
December 31, 1998. The Summerfield Lessee also has a $5,533,484 irrevocable
Letter of Credit pledged as collateral for amounts owed to the Company under the
Percentage Leases.
Seasonality of Hotel Business
The hotel industry is seasonal in nature. Historically, the Hotels'
operations have generally reflected higher occupancy rates and ADR during the
second and third quarters. To the extent that cash flow from the
<PAGE> 6
Percentage Leases for a quarter is insufficient to fund all of the distributions
for such quarter due to seasonal and other factors, the Company may maintain the
annual distribution rate by funding quarterly distributions with available cash
or borrowings under the Line of Credit.
Inflation
Operators of hotels, including the Lessees and any third-party managers
retained by the Lessees, in general possess the ability to adjust room rates
quickly. However, competitive pressures have limited and may in the future limit
the ability of the Lessees and any third-party managers retained by the Lessees
to raise room rates in response to inflation.
Year 2000 issue
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any systems
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in major system failures or
miscalculations. The Company and the Lessees have initiated programs to address
the challenges the Year 2000 may present to their systems and applications. This
program includes or will include computer systems and applications operated by
the Company or the Lessees, systems of third parties upon whose data or
functionality the Company or the Lessees rely (for example: Marriott, Promus,
banks, credit card companies, utilities and Patriot American Hospitality, Inc.),
and certain other systems or assets which contain date sensitive technology.
Based upon its investigation to date, neither the Company nor the
Lessees have yet identified any material Year 2000 issues with respect to their
systems. By the end of the second quarter of 1999, management expects to have
substantially completed (i) the assessment phase of the program and (ii) any
necessary modifications to their own systems, and necessary conversions to new
software and related testing. As part of the compliance program, the Company has
initiated or will initiate communications with those third parties whose failure
to timely convert their systems could reasonably be expected to have an impact
on the Company's operations.
Although the Company does not believe the Year 2000 issue will have a
material impact on the Company's operations, there can be no guarantee that the
Company's, the Lessees' or any third party's Year 2000 remediation efforts will
be fully compliant. If noncompliance is extensive, this could have a material
effect on the Company's or the Lessees' business, financial conditions, results
of operation and liquidity. The Company has not hired any external consultants
or incurred any additional costs to address possible remedial efforts in
connection with computer software that could be affected by the Year 2000
problem; although it may retain such consultants or incur additional costs in
the future as circumstances warrant. The use of the Company's own information
system personnel to address the Year 2000 problem has not delayed other
information systems projects or affected normal operations. Conflicts regarding
the time demands on its and its Lessees' information systems' personnel of Year
2000 remediation efforts and maintaining/supporting normal operations may cause
delays or create issues in one or both functions. Management does not consider
the incurred or estimated costs of its compliance program to be material. This
assessment could differ materially if either the scope or schedule progress with
its compliance program is significantly altered.
The Company and the Lessees intend to establish contingency plans to
handle any unknown or potential material issues that may arise from the Year
2000 issue. The Company expects any contingency plans to be completed in the
third quarter of 1999. The Company's and the Lessees' critical applications
include its reservations systems, credit card transmission, security systems,
payment systems, utilities, payroll, accounts payable and receivable and other
financial applications. Should any or all of the critical applications fail to
perform properly subsequent to January 1, 2000, other than utilities, the
Company intends that it and its Lessees will resort to temporary manual
processing, which will slow operations but is not expected to have a material
adverse impact on its operations in the long-term.
This discussion includes forward-looking statements of the Company's
efforts and managements expectations relating to Year 2000 readiness. The
Company's ability to achieve Year 2000 readiness and the level of incremental
costs associated therewith, could be adversely impacted by, among other things,
the availability and costs of programming and testing resources, vendors'
ability to install or modify proprietary hardware and software, unanticipated
problems identified in the ongoing Year 2000 readiness review and problems that
may not be identifiable despite reasonable efforts.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, including, without
limitation, statements containing the words "believes," "anticipates," "expects"
and words of similar import. Such forward-looking statements relate to future
events and the future financial performance of the Company, and involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from the results or achievements expressed or implied by such forward-looking
statements. The Company is not obligated to update any such factors or to
reflect the impact of actual future events or developments on such
forward-looking statements.
Funds From Operations
Funds From Operations ("FFO") is a widely used measure of performance
for an equity REIT. FFO, as defined by the National Association of Real Estate
Investment Trusts ("NAREIT"), is income (loss) before minority interest
(determined in accordance with generally accepted accounting principles),
excluding gains (losses) from debt restructuring and sales of property, plus
real estate related depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures. FFO is presented to assist
investors in analyzing the performance of the Company. The Company's method of
calculating FFO may be different from methods used by other REITs and,
accordingly, may not be comparable to such other REITs. FFO (i) does not
represent cash flows from operating activities as defined by generally accepted
accounting principles, (ii) is not indicative of cash available to fund all cash
flow and liquidity needs, including its ability to make distributions, and (iii)
should not be considered as an alternative to net income (as determined in
accordance with generally accepted accounting principles) for purposes of
evaluating the Company's operating performance.
The following presents the Company's calculation of FFO and FFO per
share for the years ended December 31, 1998, 1997, and 1996 (in thousands,
except share and per share data):
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income applicable to
common shareholders $ 26,980 $ 22,783 $ 8,489
Minority interest, common 1,829 1,879 531
Minority interest, preferred 4,693 4,551 729
Gain on sale of hotels, net (333) -- --
Extraordinary loss 2,760 -- --
Depreciation 30,855 18,305 7,421
Preferred share dividends 6,184 -- --
- --------------------------------------------------------------------------------
FFO $ 72,968 $ 47,518 $ 17,170
================================================================================
Denominator for diluted
earnings per share 33,673,441 26,933,351 12,931,327
Weighted average:
Common Units 2,285,895 2,207,155 766,945
Preferred Units 4,063,329 4,063,329 666,119
Convertible
preferred shares 4,250,920 -- --
- --------------------------------------------------------------------------------
Denominator for FFO
per share 44,273,585 33,203,835 14,364,391
- --------------------------------------------------------------------------------
FFO per share $ 1.65 $ 1.43 $ 1.20
================================================================================
</TABLE>
<PAGE> 7
Consolidated Balance Sheets
December 31, 1998 and 1997
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investment in hotel properties:
Land and improvements $ 90,103 $ 71,508
Buildings and improvements 573,846 449,813
Furniture and equipment 87,828 63,439
Renovations in process 12,228 14,837
Hotels under development 216 1,911
- ----------------------------------------------------------------------------------------------
764,221 601,508
Accumulated depreciation (65,923) (35,865)
- ----------------------------------------------------------------------------------------------
Net investment in hotel properties 698,298 565,643
Cash and cash equivalents 2,642 4,228
Restricted cash and cash equivalents 6,893 6,748
Due from Lessees 10,699 4,417
Deferred expenses, net 4,191 5,235
Deposits under purchase agreements 1,000 5,050
Other assets 1,391 1,286
- ----------------------------------------------------------------------------------------------
Total assets $725,114 $592,607
==============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $191,183 $160,455
Accounts payable and accrued expenses 6,714 4,461
Distributions payable 13,023 10,501
Minority interest in Partnership 59,802 74,552
- ----------------------------------------------------------------------------------------------
Total liabilities 270,722 249,969
==============================================================================================
Commitments and contingencies (note 6)
Shareholders' equity:
Preferred shares, $0.01 par value, 20,000,000 shares
authorized, 4,630,000 shares issued and outstanding
at December 31, 1998 115,750 --
Common shares, $0.01 par value, 100,000,000 shares
authorized, 34,541,586 and 32,848,608 issued and outstanding
at December 31, 1998 and 1997, respectively 345 328
Additional paid-in capital 365,711 355,828
Unearned compensation (4,901) (1,812)
Distributions in excess of net earnings (22,513) (11,706)
- ----------------------------------------------------------------------------------------------
Total shareholders' equity 454,392 342,638
==============================================================================================
Total liabilities and shareholders' equity $725,114 $592,607
==============================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 8
Consolidated Statements of Income
for the years ended December 31, 1998, 1997 and 1996
(in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Percentage Lease revenue $103,022 $65,433 $27,466
Other revenue 745 1,380 911
- ------------------------------------------------------------------------------------------------------------
Total revenue 103,767 66,813 28,377
============================================================================================================
Expenses:
Depreciation 30,855 18,305 7,421
Amortization of franchise costs 73 37 89
Ground rent 453 402 376
Interest expense 15,149 9,255 5,839
Amortization of loan origination fees 1,047 1,185 867
Real estate and personal property taxes and property insurance 9,888 5,645 2,803
General and administrative 3,645 2,347 1,186
Amortization of unearned compensation 544 424 47
- ------------------------------------------------------------------------------------------------------------
Total expenses 61,654 37,600 18,628
============================================================================================================
Income before minority interest and other nonrecurring items 42,113 29,213 9,749
Minority interest, common (1,829) (1,879) (531)
Minority interest, preferred (4,693) (4,551) (729)
Gain on sale of hotels, net 333 -- --
Extraordinary loss (2,760) -- --
- ------------------------------------------------------------------------------------------------------------
Net income 33,164 22,783 8,489
Preferred share dividends (6,184) -- --
- ------------------------------------------------------------------------------------------------------------
Net income applicable to common shareholders $ 26,980 $22,783 $ 8,489
============================================================================================================
Earnings per share data:
Basic-before extraordinary loss $ 0.89 $ 0.85 $ 0.66
Extraordinary loss 0.08 -- --
- ------------------------------------------------------------------------------------------------------------
Basic $ 0.81 $ 0.85 $ 0.66
============================================================================================================
Diluted-before extraordinary loss $ 0.88 $ 0.85 $ 0.66
Extraordinary loss 0.08 -- --
- ------------------------------------------------------------------------------------------------------------
Diluted $ 0.80 $ 0.85 $ 0.66
============================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 9
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1998, 1997 and 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
Distri-
Preferred Shares Common Shares Addi- butions Total
------------------- -------------- tional Unearned in Excess Share-
Redemption Par Paid-in Compen- of Net holders'
Shares Value Shares Value Capital sation Earnings Equity
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 -- -- 10,817,883 $108 $ 90,659 $ (185) $ (2,336) $ 88,246
Amortization of unearned compensation -- -- -- -- -- 47 -- 47
Common share offering, net -- -- 11,500,000 115 116,905 -- -- 117,020
Dividend reinvestment and share
purchase plan, net -- -- 804 -- (38) -- -- (38)
Conversion of common units -- -- 3,811 -- 38 -- -- 38
Allocation from minority interest -- -- -- -- 6,128 -- -- 6,128
Net income -- -- -- -- -- -- 8,489 8,489
Distributions declared-common shares -- -- -- -- -- -- (12,325) (12,325)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 -- -- 22,322,498 223 213,692 (138) (6,172) 207,605
===============================================================================================================================
Issuance of restricted shares -- -- 150,964 1 2,097 (2,098) -- --
Amortization of unearned compensation -- -- -- -- -- 424 -- 424
Common share offering, net -- -- 10,284,000 103 135,183 -- -- 135,286
Dividend reinvestment and share
purchase plan, net -- -- 1,421 -- 19 -- -- 19
Shelf registration statement costs -- -- -- -- (88) -- -- (88)
Conversion of common units -- -- 89,725 1 1,190 -- -- 1,191
Allocation from minority interest -- -- -- -- 3,735 -- -- 3,735
Net income -- -- -- -- -- -- 22,783 22,783
Distributions declared-common shares -- -- -- -- -- -- (28,317) (28,317)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 -- -- 32,848,608 328 355,828 (1,812) (11,706) 342,638
===============================================================================================================================
Issuance of restricted shares -- -- 384,688 4 3,629 (3,633) -- --
Amortization of unearned compensation -- -- -- -- -- 544 -- 544
Preferred share offering, net 4,630,000 $115,750 -- -- (4,198) -- -- 111,552
Dividend reinvestment and share
purchase plan, net -- -- 2,917 -- 37 -- -- 37
Shelf registration statement costs -- -- -- -- (59) -- -- (59)
Conversion of common units -- -- 1,305,373 13 19,141 -- -- 19,154
Allocation to minority interest -- -- -- -- (8,667) -- -- (8,667)
Net income -- -- -- -- -- -- 33,164 33,164
Distributions declared-common shares -- -- -- -- -- -- (37,787) (37,787)
Distributions declared-preferred shares -- -- -- -- -- -- (6,184) (6,184)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 4,630,000 $115,750 34,541,586 $345 $ 365,711 $(4,901) $(22,513) $454,392
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 10
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996
(in thousands, except supplemental non-cash financing activities)
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 33,164 $ 22,783 $ 8,489
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 32,519 19,951 8,424
Minority interests 6,522 6,430 1,260
Gain on sale of hotels, net (333) -- --
Extraordinary loss 2,760 -- --
Changes in operating assets and liabilities:
Due from Lessees (6,282) (876) (1,493)
Deferred expenses, net -- -- (182)
Other assets (105) (632) 212
Accounts payable and accrued expenses 2,253 1,547 484
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 70,498 49,203 17,194
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in hotel properties (177,966) (239,180) (109,104)
Proceeds from sale of hotels 19,950 -- --
Net deposits into restricted cash accounts (145) (2,348) (4,400)
Payments for franchise fees (102) (166) (610)
Deposits under purchase agreements (1,000) (5,050) --
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (159,263) (246,744) (114,114)
- -------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt issuance 337,149 221,628 46,307
Payments on long-term debt (306,421) (161,913) (16,139)
Dividend reinvestment plan and shelf registration costs paid (22) (88) (38)
Distributions paid to unit holders (7,573) (5,062) (1,395)
Distributions paid to shareholders (41,093) (24,798) (9,630)
Redemption of units (3,568) -- --
Proceeds from issuance of common shares, net -- 135,305 116,641
Proceeds from issuance of preferred shares, net 111,552 -- --
Loan origination fees and costs paid (2,845) (3,642) (580)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 87,179 161,430 135,166
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,586) (36,111) 38,246
Cash and cash equivalents at beginning of year 4,228 40,339 2,093
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,642 $ 4,228 $ 40,339
=============================================================================================================
Supplemental cash flow information:
Interest paid $ 15,136 $ 9,256 $ 5,704
=============================================================================================================
</TABLE>
Supplemental non-cash financing activities:
The Company issued 119,473 Common Units, with a deemed value at the
time of issuance of $1,359,000, and 4,063,329 Class B Preferred Units, with a
deemed value at the time of issuance of $44,697,000, for the acquisition of
eight hotel properties during the year ended December 31, 1996.
The Company assumed $24,936,000 of long-term indebtedness in connection
with the acquisition of three hotel properties during the year ended December
31, 1996.
The Company issued 2,307,763 Common Units, with a deemed value at the
time of issuance of $33,995,000, for the acquisition of 11 hotel properties
during the year ended December 31, 1997.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 11
Notes to Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
Organization
Innkeepers USA Trust ("Innkeepers") is a self-administered real estate
investment trust ("REIT"), which commenced operations on September 30, 1994.
Innkeepers initially acquired an 87.7% equity interest in Innkeepers USA Limited
Partnership (with its subsidiary partnerships, the "Partnership" and
collectively with Innkeepers, the "Company") which owned seven hotels with an
aggregate of 851 rooms. At December 31, 1998, Innkeepers owned interests in 63
hotels with an aggregate of 7,639 rooms (the "Hotels") through its 95.7%
interest in the Partnership. The Hotels are comprised of 41 Residence Inn by
Marriott hotels, 12 Hampton Inn hotels, six Summerfield Suites hotels, one
Sunrise Suites hotel, one Comfort Inn hotel, one Courtyard by Marriott hotel,
and one Holiday Inn Express hotel. The Hotels are located in 23 states, with 11
hotels located in California.
The Company leases 56 of the Hotels to Innkeepers Hospitality, Inc.,
formerly known as JF Hotel, Inc. (or other entities under common ownership,
collectively the "IH Lessee"), and seven of the Hotels to affiliates of Patriot
American Hospitality, Inc. (the "Summerfield Lessee" and collectively with the
IH Lessee, the "Lessees") pursuant to leases which provide for rent based on the
room revenues of the Hotels ("Percentage Leases"). Two officers of the Company
are the shareholders of the IH Lessee. A trustee of the Company is a director of
the Summerfield Lessee.
Principles of consolidation
The consolidated financial statements include the accounts of
Innkeepers and the Partnership after elimination of all significant
inter-company accounts and transactions.
Investment in hotel properties
Hotel properties are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets (five years
for furniture and equipment, 15 years for land improvements and 40 years for
buildings and improvements). The Company periodically evaluates the carrying
value of its hotel properties to measure and recognize the possible impairment
of these assets. The Company believes that no such impairment existed at
December 31, 1998 or 1997.
Costs directly related to the acquisition and development of hotels are
capitalized. Real estate taxes, insurance and interest incurred during the
development period are also capitalized.
Routine repairs and maintenance at the Hotels are the responsibility of
the Lessees and are charged to expense as incurred; major renewals and
betterments are the responsibility of the Company and are capitalized. Upon sale
or disposition, the asset and related accumulated depreciation are removed from
the accounts, and the gain or loss is included in operations.
Cash and cash equivalents
All highly liquid debt investments with a maturity of three months or
less when purchased are considered to be cash equivalents. Cash equivalents are
placed with reputable institutions and the balances may at times exceed federal
depository insurance limits.
Restricted cash and cash equivalents include amounts the Company must
make available to the Lessees for the replacement and refurbishment of furniture
and equipment and certain other capital expenditures at the Hotels and amounts
held in escrow by certain lenders for the payment of insurance, real estate
taxes and certain capital expenditures.
Deferred expenses
Deferred expenses are recorded at cost and consist primarily of loan
origination fees and costs and franchise application and transfer fees.
Amortization of franchise fees is computed using the straight-line method over
the original lives of the franchise agreements which range from approximately
three to 13 years. Loan origination fees and costs are amortized using the
interest method over the original terms of the related indebtedness, which are
three to 12 years.
Deposits under purchase agreements
Deposits under purchase agreements represent payments made by the
Company to the sellers of certain hotels under purchase and sale agreements.
Generally, these amounts are held in escrow until the closing of the purchase of
the hotel properties.
Minority interest
Minority interest represents the limited partners' proportionate share
in the equity of the Partnership. Income is allocated to the preferred unit
holders based on their priority in net income of the Partnership; then, income
is allocated to the common unit holders based on their weighted average
percentage ownership in the Partnership.
Revenue recognition
Percentage Lease revenue is recognized as earned from the Lessees under
each percentage lease agreement. The Company must rely on the Lessees to
generate sufficient cash flow from the operation of the Hotels to enable the
Lessees to meet the rent obligations under the Percentage Leases. The
obligations of the Summerfield Lessee under its Percentage Lease agreements are
collateralized by a $5,533,484 irrevocable letter of credit. The obligations of
the IH Lessee under its Percentage Leases are not collateralized. The IH Lessee
has only nominal assets, other than working capital, and the Lessees have met
all rent obligations when due under the Percentage Leases.
Stock based compensation
The Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related
Interpretations. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
<PAGE> 12
Distributions
The Company intends to pay regular quarterly distributions which, at a
minimum, will be sufficient for the Company to maintain its REIT status.
Income taxes
The Company has elected to be taxed as a real estate investment trust
under the Internal Revenue Code. Accordingly, no provision for federal income
taxes has been reflected in the financial statements. Earnings and profits,
which determine the taxability of distributions to common shareholders, will
differ from net income reported for financial reporting purposes primarily due
to the differences in the estimated useful lives and methods used to compute
depreciation for federal tax purposes.
The following table sets forth certain per share information regarding
the Company's common share distributions for the years ended December 31, 1998,
1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Total distribution $1.12 $1.02 $0.90
Ordinary income $1.06 $0.88 $0.71
Return of capital $0.05 $0.14 $0.19
Unrecaptured Section 1250 gain $0.01 $ -- $ --
</TABLE>
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair value of financial instruments
The carrying amount of cash and cash equivalents approximates fair
value due to the short maturity of these instruments.
The fair value of long-term debt is not materially different from its
carrying amount and is estimated based on current rates offered to the Company
for similar debt.
2. ACQUISITIONS AND SALES OF HOTEL PROPERTIES
The Company acquired the following hotel properties during the years
ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Number of Date Purchase
Hotel Suites/Rooms Acquired Price
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Residence Inn-Eden Prairie, MN 126 1/4/97 $11,250,000
Residence Inn-Addison, TX 150 2/1/97 14,500,000
Residence Inn-Arlington, TX 114 2/1/97 10,500,000
Summerfield Suites-Belmont, CA 132 6/20/97 (a)
Summerfield Suites-El Segundo, CA 122 6/20/97 (a)
Summerfield Suites-West Hollywood, CA 109 6/20/97 (a)
Summerfield Suites-Mount Laurel, NJ 116 6/20/97 (a)
Summerfield Suites-Addison, TX 132 6/20/97 (a)
Summerfield Suites-Irving (Las Colinas), TX 148 6/20/97 (a)
Sunrise Suites-Eatontown (Tinton Falls), NJ 96 6/20/97 (a)
Sierra Suites-Phoenix (Camelback), AZ (f) 113 6/20/97 (a)
Sierra Suites-Atlanta (Cumberland), GA (f) 89 6/20/97 (a)
Hampton Inn-Schaumburg (Chicago), IL 128 6/26/97 (b)
Hampton Inn-Westchester (Chicago), IL 112 6/26/97 (b)
Hampton Inn-Lombard (Chicago), IL 128 6/26/97 (b)
Residence Inn-Shelton, CT 96 10/31/97 11,150,000
Residence Inn-Ontario, CA 200 12/30/97 (c)
Residence Inn-Altamonte Springs, FL 128 12/30/97 (c)
Residence Inn-Fort Wayne, IN 80 12/30/97 (c)
Residence Inn-Indianapolis, IN 88 12/30/97 (c)
Residence Inn-Lexington, KY 80 12/30/97 (c)
Residence Inn-Louisville, KY 96 12/30/97 (c)
Residence Inn-Columbus, OH 80 12/30/97 (c)
Residence Inn-Winston-Salem, NC 88 12/30/97 (c)
Residence Inn-Bothell, WA 120 1/9/98 11,750,000
Residence Inn-Lynnwood, WA 120 1/14/98 (d)
Residence Inn-Vancouver, WA 120 1/14/98 (d)
Residence Inn-Bellevue, WA 120 1/14/98 (d)
Residence Inn-Tukwila, WA 144 1/14/98 (d)
Residence Inn-Lake Oswego, OR 112 1/14/98 (d)
Sierra Suites-Westborough, MA (f) 113 6/22/98 7,900,000
Residence Inn-Gaithersburg, MA 132 7/10/98 (e)
Residence Inn-Atlanta, GA 120 10/9/98 (e)
Residence Inn-San Jose, CA 150 11/6/98 (e)
</TABLE>
(a) Aggregate purchase price of $118,547,000
(b) Aggregate purchase price of $19,100,000
(c) Aggregate purchase price of $59,500,000
(d) Aggregate purchase price of $83,000,000
(e) Aggregate purchase price of $89,100,000, which includes three hotels that
had not been purchased as of December 31, 1998
(f) Hotel sold on October 23, 1998
These acquisitions have been accounted for under the purchase method of
accounting. The results of operations have been included in the accompanying
financial statements since the date of acquisition.
On October 23, 1998 the Company sold its three Sierra Suites hotels for
$19,950,000 to an affiliate of Rolf Ruhfus (the "Sierra Suites Buyer"), a
trustee of the Company and a director of the Summerfield Lessee. The Company
acquired two of the Sierra Suites hotels from affiliates of Mr. Ruhfus in July
1997, in connection with its acquisition of six Summerfield Suites hotels, and
developed the third Sierra Suites hotel in 1998. In connection with the July
1997 acquisition, (a) the Company obtained the right to terminate the
Summerfield Leases for its Sierra Suites hotels in certain circumstances and (b)
affiliates of Mr. Ruhfus obtained the right to acquire from the Company any
Sierra Suites hotels with respect to which the Company exercised its right to
terminate the Summerfield Leases, for purchase prices equal to the Company's
investment in those hotels. When the Sierra Suites brand was acquired by
affiliates of Patriot American Hospitality, Inc. in June 1998, the Company
terminated the leases for its three Sierra Suites hotels. The Sierra Suites
Buyer then
<PAGE> 13
exercised its right to acquire those hotels. When the Company acquired two of
the Sierra Suites hotels in July 1997, a portion of the purchase price was paid
with 233,612 Common Units (as defined in Note 6). In connection with the sale of
three Sierra Suites hotels in October 1998, the Company redeemed 233,612 Common
Units with a deemed value of $3,504,000, which was applied to the purchase
price.
3. LONG-TERM DEBT
Long-term debt at December 31, 1998 consists of (a) mortgage notes
collateralized by the Hampton Inn hotel located in West Palm Beach, Florida (the
"Florida Mortgage Note") and a Residence Inn hotel located in Sunnyvale,
California (the "California Mortgage Note"); (b) two industrial development
bonds (the "Michigan Mortgage Notes"); (c) outstanding borrowings under the
Company's $250 million line of credit (the "Line of Credit"); and (d)
outstanding borrowings under three term loans (the "First Term Loan," "Second
Term Loan" and "Third Term Loan").
The Florida Mortgage Note is payable in equal monthly installments of
$23,526, including interest at a fixed rate of 5.0% per annum through January
2002, at which time all outstanding principal and interest is due. The
outstanding principal balance on the Florida Mortgage Note was approximately
$3.4 million and $3.5 million at December 31, 1998 and 1997, respectively.
The California Mortgage Note is payable in equal monthly installments
of $141,331, including interest at an implied fixed rate of 7.0% per annum
through June 2010, at which time all outstanding principal and interest is due.
The outstanding principal balance on the California Mortgage Note was
approximately $18.1 million and $14.8 million at December 31, 1998 and 1997,
respectively.
The Michigan Mortgage Notes are payable in monthly interest only
payments, at a variable interest rate (3.1% and 3.8% at December 31, 1998 and
1997, respectively), which is based upon the 30-day yield of a group of tax
exempt securities selected by an independent party, through December 2014, at
which time all outstanding principal and interest is due. The Michigan Mortgage
Notes are collateralized by irrevocable letters of credit. The outstanding
principal balance on the Michigan Mortgage Notes was $10.0 million at December
31, 1998 and 1997.
On February 19, 1998, the Company obtained its new Line of Credit. The
Line of Credit is uncollateralized and has a maximum borrowing amount of
$250,000,000. The interest rate on the Line of Credit is LIBOR plus 122.5 to
162.5 basis points and at December 31, 1998 borrowings under the Line of Credit
bore interest at an average interest rate of approximately 6.7%. At December 31,
1998, the Company had approximately $189,000,000 in additional borrowing
capacity under the Line of Credit, subject to borrowing base availability as
defined under the loan agreement. The Company utilized the Line of Credit to
repay borrowings outstanding on the Company's previous line of credit (the
"Previous Line of Credit"). Upon closing of the Line of Credit, the Previous
Line of Credit was extinguished. The Company was amortizing the loan origination
fees and costs incurred in connection with the Previous Line of Credit over its
original three-year term. When the Previous Line of Credit was extinguished and
replaced with the Line of Credit, the loan origination fees and costs associated
with the Previous Line of Credit were expensed immediately and recognized as an
extraordinary loss of approximately $2,760,000 in February 1998. The outstanding
principal balance on the Line of Credit and the Previous Line of Credit was
$48,450,000 and $60,300,000 at December 31, 1998 and 1997, respectively.
In March 1998, the Company entered into an interest rate cap agreement
with a notional amount of $125,000,000 and a term of one year. The agreement
effectively caps the interest rate on $125,000,000 of borrowings on the Line of
Credit at 7.625%.
The First Term Loan, in the principal amount of $30.0 million, bears
interest at an 8.17% fixed annual rate. The First Term Loan has scheduled
principal amortization over a 20-year term, with equal monthly payments of
$256,250. Interest on the outstanding principal balance of the First Term Loan
will accrue at 13.17% if the outstanding principal balance is not paid in full
by October 11, 2007. The Company anticipates repaying the remaining principal
balance of the First Term Loan on or before October 11, 2007. The outstanding
principal balance on the First Term Loan was $29.3 million and $29.9 million at
December 31, 1998 and 1997, respectively.
The Second Term Loan, in the principal amount of $42.0 million, bears
interest at an 8.15% fixed annual rate. The Second Term Loan has scheduled
principal amortization over a 20-year term, with equal monthly payments of
$355,236 commencing on April 11, 1999. Interest on the outstanding principal
balance of the Second Term Loan will accrue at 13.15% if the outstanding
principal balance is not paid in full by March 11, 2009. The Company anticipates
repaying the remaining principal balance of the Second Term Loan on or before
March 11, 2009. The outstanding principal balance on the Second Term Loan was
$42.0 million at December 31, 1998 and 1997, respectively.
The Third Term Loan, in the principal amount of $40.0 million, bears
interest at a fixed annual rate of 7.02%, and has a scheduled principal
amortization over a 25-year term, with equal monthly payments of $292,467
commencing on April 11, 2000. Interest on the outstanding principal balance of
the Third Term Loan will accrue at 12.02% if the outstanding principal balance
is not paid in full by April 11, 2010. The Company anticipates repaying the
remaining principal balance of the Third Term Loan on or before April 11, 2010.
The outstanding principal balance on the Third Term Loan was $40.0 million on
December 31, 1998.
At December 31, 1998, 26 of the Company's hotel properties
collateralized the long-term debt described previously and 37 of the Company's
hotel properties were unencumbered. Under the Company's loan agreements, the
Company is required to satisfy various affirmative and negative covenants. The
Company was in compliance with these covenants at December 31, 1998 and 1997.
Aggregate annual principal payments for the Company's long-term debt at
December 31, 1998 are due as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 1,903
2000 2,700
2001 51,568
2002 6,218
2003 3,490
Thereafter 125,304
-----------------------------------------------------
$191,183
=====================================================
</TABLE>
4. SHARE OPTION AND RESTRICTED COMMON SHARE PLAN
The Company's share incentive plan for employees and officers (the
"1994 Plan") reserves 2,700,000 common shares for issuance (a) upon the exercise
of incentive share options and non-qualified options or (b) as restricted shares
and performance shares. Options granted under the 1994 Plan expire not more than
ten years from the date of grant. The Company may grant up to 900,000 restricted
shares and performance
<PAGE> 14
shares under the 1994 Plan. Restricted shares have voting and dividend
rights from the date granted.
The exercise price of common share options may not be less than fair
market value of the common shares at the date of grant. The table below
delineates information concerning outstanding common share options granted under
the 1994 Plan.
<TABLE>
<CAPTION>
Weighted Average
Granted Common Shares Option Price
- ------------------------------------------------------------
<S> <C> <C>
1994 250,000 $ 10.00
1995 20,000 8.875
1996 156,000 9.75
1997 1,292,500 13.31
1998 8,500 13.03
- ------------------------------------------------------------
$ 12.46
============================================================
</TABLE>
Of the 1,727,000 common share options granted, 250,810 are incentive
share options and 1,476,190 are non-qualified options. As of December 31, 1998,
1,036,166 common share options with a weighted average exercise price of $12.30
were vested and no common share options have been exercised, forfeited or
terminated. The incentive share options and non-qualified options vest over
varying periods, not exceeding ten and five years, respectively.
Under the 1994 Plan, the Company has granted restricted shares to
employees as follows:
<TABLE>
<CAPTION>
Grant Restricted Vesting Vesting
Date Shares Period Beginning
- --------------------------------------------------------------------------
<S> <C> <C> <C>
May 7, 1997 118,750 Seven years February 7, 1997
January 1, 1998 29,688 Six years January 1, 1998
October 9, 1998 355,000 Five years January 1, 1999
January 1, 1999 135,000 Five years January 1, 1999
</TABLE>
Of the 638,438 restricted shares granted under the 1994 Plan, 16,963
restricted shares were vested at December 31, 1998.
The Company's trustees share incentive plan provides for the granting
of incentive share options and restricted shares to trustees. Restricted shares
have voting and dividend rights from the date granted. Options granted under the
trustees plan expire not more than ten years from the date of grant.
The Company has granted an aggregate of 32,000 non-qualified options to
trustees. The table below delineates information concerning outstanding common
share options granted under its trustees plan.
<TABLE>
<CAPTION>
Weighted Average
Granted Common Shares Option Price
- --------------------------------------------------------
<S> <C> <C>
1994 15,000 $10.00
1996 3,000 11.75
1997 8,000 14.27
1998 6,000 14.19
- --------------------------------------------------------
$12.02
========================================================
</TABLE>
The common share options vest over varying periods not exceeding five
years. As of December 31, 1998, 26,000 common share options were vested and no
common share options have been exercised, forfeited or terminated.
The Company has also granted 56,214 restricted shares to its
non-employee trustees, which vest over varying periods not to exceed five years.
At December 31, 1998, 42,156 restricted shares were vested.
The following unaudited pro forma net income and net income per share
of the Company are presented as if compensation cost for the Company's share
option grants were recorded in the statements of income. The pro forma net
income and net income per share are not necessarily indicative of the operating
results of the Company, nor do they purport to represent the results of
operations of future periods.
The fair value of each share option granted in 1998 and 1997 was $1.92
and $1.97 and is estimated on the date of grant using the Black-Scholes
Option-Pricing Model with the following assumptions: (1) dividend of 7.0% on the
common shares, (2) expected volatility of approximately 27% and 25%,
respectively, in the Company's common share price, (3) a risk-free interest rate
of 5.3% and 6.0% to 6.6%, respectively, and (4) an expected option life of three
to six years. Compensation cost for options granted to employees, on a pro forma
basis, was $526,000, $1,416,000 and $60,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income applicable
to common
shareholders $26,980 $26,477 $22,783 $21,458 $8,489 $ 8,432
Diluted
earnings per share $ 0.80 $ 0.79 $ 0.85 $ 0.80 $ 0.66 $ 0.65
</TABLE>
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the years ended December 31, 1998, 1997 and 1996 (in thousands, except
share and per share data):
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net income $ 33,164 $ 22,783 $ 8,489
Preferred share dividends (6,184) -- --
- -----------------------------------------------------------------------------------------
Net income applicable to
common shareholders 26,980 22,783 8,489
Extraordinary loss 2,760 -- --
- -----------------------------------------------------------------------------------------
Net income applicable to common
shareholders before
extraordinary loss $ 29,740 $ 22,783 $ 8,489
- -----------------------------------------------------------------------------------------
Denominator:
Denominator for basic
earnings per share --
weighted-average shares 33,482,451 26,653,835 12,891,993
Effect of dilutive securities:
Stock options 167,311 260,318 37,696
Restricted shares 23,679 19,198 1,638
- -----------------------------------------------------------------------------------------
Denominator for diluted
earnings per share --
adjusted weighted
average shares and
assumed conversions 33,673,441 26,933,351 12,931,327
- -----------------------------------------------------------------------------------------
Earnings per share data:
Basic-before extraordinary loss $ 0.89 $ 0.85 $ 0.66
Extraordinary loss 0.08 -- --
- -----------------------------------------------------------------------------------------
Basic $ 0.81 $ 0.85 $ 0.66
- -----------------------------------------------------------------------------------------
Diluted-before extraordinary loss $ 0.88 $ 0.85 $ 0.66
Extraordinary loss 0.08 -- --
- -----------------------------------------------------------------------------------------
Diluted $ 0.80 $ 0.85 $ 0.66
=========================================================================================
</TABLE>
6. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Pursuant to the Partnership's partnership agreement, limited partners
who hold common units of limited partnership interest in the Partnership
("Common Units") have redemption rights ("Redemption Rights") which enable them
to redeem each of their Common Units for cash at the then current fair value of
a common share or, at Innkeeper's option, common shares on a one-for-one basis.
Substantially all of the Redemption Rights are currently effective. The
aggregate number of
<PAGE> 15
Common Units outstanding was 1,540,294 and 3,084,409 at December 31, 1998 and
1997, respectively.
Additionally, limited partners who hold preferred units of limited
partnership interest in the Partnership ("Class B Preferred Units" and
collectively with the Common Units, "Units") have Redemption Rights which enable
them to redeem each of their Class B Preferred Units for cash at the then
current fair value of a common share or, at Innkeeper's option, common shares on
a one-for-one basis. The aggregate number of Class B Preferred Units outstanding
was 4,063,329 at December 31, 1998 and 1997.
The Company pays regular quarterly distributions on its common shares
and Common Units and the current quarterly distribution is $0.28 per share.
Annual preferred distributions of $1.10 to $1.155 are payable on each Class B
Preferred Unit, and are based on the dividends payable on the common shares. At
December 31, 1998, the quarterly preferred distribution rate is $0.28875 for
each Class B Preferred Unit ($1.155 on an annualized basis). The Class B
Preferred Units have a preference value of $11.00 per unit, may be converted
into Common Units at any time on a one-for-one basis and will be converted into
Common Units on November 1, 2006 unless previously converted or redeemed.
In May 1998, the Company sold 4,630,000 8.625% Series A cumulative
convertible preferred shares of beneficial interest (the "Series A Preferred
Shares") at $25 per share. The Series A Preferred Shares are convertible into
1.4811 common shares at any time and, therefore, the Company has reserved
6,857,493 common shares for issuance upon conversion. The Series A Preferred
Shares are redeemable by the Company after May 18, 2003 and have no stated
maturity or sinking fund requirements. The Series A Preferred Shares will
automatically convert into common shares in May 2008 unless previously converted
or redeemed. The Series A Preferred Shares have a liquidation preference of $25
per share and are entitled to annual dividends equal to the greater of (i)
$2.15624 per share ($0.53906 per share payable quarterly) or (ii) the cash
dividend paid or payable on the number of common shares into which a Series A
Preferred Share is then convertible. The net proceeds of the Series A Preferred
Share offering were used to repay borrowings outstanding under the Line of
Credit.
The Hotels are operated under franchise or management agreements with
the Lessees as Residence Inn by Marriott, Summerfield Suites, Sunrise Suites,
Hampton Inn, Courtyard by Marriott, Holiday Inn Express or Comfort Inn hotels.
The Company has paid the cost of obtaining or transferring certain franchise
license agreements to the IH Lessee. For certain hotels which did not require a
franchise transfer fee, the Company has advanced to the IH Lessee the working
capital deposit required under the IH Lessee's management agreements with
Residence Inn by Marriott, Inc. ("RIBM"). The franchise and management
agreements require the Lessees to pay fees based on percentages of hotel
revenue. The Company has guaranteed certain of the IH Lessee's obligations under
the franchise licenses and the RIBM management agreements, generally, in
exchange for certain rights to substitute replacement lessees if the Company
terminates the related Percentage Lease.
Under the Percentage Leases, the Company generally is obligated to pay
the costs of certain capital improvements, real estate and personal property
taxes and property insurance for the Hotels. Additionally, the Company must make
available to the Lessees an amount equal to 4.0% of room revenues from the
Hotels, on a monthly basis, for the periodic replacement or refurbishment of
furniture and equipment and certain other expenditures at the Hotels. The Second
Term Loan and Third Term Loan require that the Company make available for such
purposes, at the Hotels collateralizing those loans, an additional 1.0% (for a
total of 5.0%) of room revenues from such Hotels.
For the years ended December 31, 1998, 1997 and 1996, Percentage Lease
revenue consists of base rents of $57,851,000, $25,580,000, and $10,212,000,
respectively and percentage rents in excess of base rents of $45,171,000,
$39,853,000, and $17,254,000, respectively. The Lessees have future minimum base
rent commitments under the Percentage Lease agreements to the Company. Minimum
future base rent revenue, under the Percentage Lease agreements, are as follows
through the year 2012 (in thousands):
<TABLE>
<CAPTION>
Year Amount
----------------------------------------------------
<S> <C>
1999 $ 59,042
2000 59,042
2001 59,042
2002 59,042
2003 59,042
Thereafter 323,985
----------------------------------------------------
$619,195
====================================================
</TABLE>
The Company's Declaration of Trust limits the consolidated indebtedness
of the Company to 50.0% of the Company's investment in hotels, at cost, after
giving effect to the Company's use of proceeds from any indebtedness. The
Company's consolidated indebtedness was approximately $191,183,000 or 25.0% of
its investment in hotels, at cost, at December 31, 1998.
The Company has two fifty-year term ground leases expiring July 2034
and May 2035, respectively, and a 98-year term ground lease expiring October
2084, on the land underlying three of its hotel properties. Minimum annual rent
payable under these leases is approximately $460,000 in the aggregate.
The Company is committed to purchase a 112-room Residence Inn by
Marriott hotel located in Detroit (Livonia), Michigan for approximately
$10,200,000, with closing on this hotel anticipated in March 1999. The Company
is also committed to purchase a 95-room Towne Place Suites hotel located in
Horsham, Pennsylvania, for approximately $8,000,000 upon completion of its
development, which is anticipated in May 1999. The Company expects to fund these
purchases through the Line of Credit and available cash.
The Company has paid $100,000 to the IH Lessee for usage of office
facilities in each of the years ended December 31, 1998, 1997 and 1996,
respectively. This amount has been recorded in general and administrative
expense in the statements of income.
The Company places substantially all of its insurance with a full
service commercial insurance broker that has developed a specialty in insuring
hotels. The broker is a private company of which a trustee owns 47% of the
stock. For the year ended December 31, 1998, the gross amount of premiums paid
for insurance placed by this broker was approximately $930,000. See also Note 2,
Acquisitions and Sales of Hotel Properties.
<PAGE> 16
7. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The unaudited pro forma statements of income of the Company are
presented as if the acquisition of the Hotels and the equity offerings in 1998
and 1997 had occurred at the beginning of the periods presented and all of the
Hotels had been leased to the Lessees pursuant to Percentage Leases at the
beginning of the periods presented. Such pro forma information is based in part
on the consolidated statements of income of the Company and the IH Lessee. In
management's opinion, all adjustments necessary to reflect the effects of these
transactions have been made.
The unaudited pro forma statements of income of the Company for the
periods presented are not necessarily indicative of what the results of the
operations of the Company would have been assuming such transactions had been
completed as of the beginning of the periods presented, nor does it purport to
represent the results of operations for future periods.
Pro Forma Consolidated Statement of Income
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended
December 31,
----------------------
1998 1997
- ----------------------------------------------------------------------
<S> <C> <C>
Revenue:
Percentage Lease revenue $107,846 $95,035
Other revenue 745 1,380
- ----------------------------------------------------------------------
Total revenue 108,591 96,415
======================================================================
Expenses:
Depreciation 33,349 27,853
Amortization of franchise costs 95 69
Ground rent 453 402
Interest expense 16,149 16,069
Amortization of loan origination fees 1,047 1,439
Real estate and personal property taxes
and property insurance 11,375 9,369
General and administrative 3,645 3,100
Amortization of unearned compensation 544 424
- ----------------------------------------------------------------------
Total expenses 66,657 58,725
======================================================================
Income before minority interest 41,934 37,690
Minority interest, common (1,172) (996)
Minority interest, preferred (4,693) (4,551)
- ----------------------------------------------------------------------
Net Income 36,069 32,143
- ----------------------------------------------------------------------
Preferred share dividends (9,983) (9,983)
Net income applicable to
common shareholders $ 26,086 $22,160
======================================================================
Diluted earnings per share $ 0.76 $ 0.64
======================================================================
</TABLE>
8. SUBSEQUENT EVENTS
On January 8, 1999, the Company purchased two Residence Inn by Marriott
hotels located in Chicago (Rosemont), Illinois and Richmond, Virginia with an
aggregate of 296 rooms for a cash price of approximately $31,268,000. The
purchase price was funded through the Line of Credit and available cash.
Effective March 1, 1999, the Company entered into an interest rate cap
agreement with a notional amount of $100,000,000 and a term of one year. The
agreement effectively caps the interest rate on $100,000,000 of borrowings on
the Line of Credit at 7.625%.
9. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued FAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," and is effective for fiscal years
beginning after December 15, 1997, FAS No. 131 requires disclosure of segment
data in an entity's annual financial statements and selected segment information
in their quarterly report to shareholders. The Company has determined that it
has only one reportable segment, therefore, no additional disclosures are
required as a result of the adoption of FAS No. 131.
Report of
Independent Accountants
To the Board of Directors and Shareholders
Innkeepers USA Trust
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, shareholders, equity and of cash
flows present fairly, in all material respects, the financial position of
Innkeepers USA Trust as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the three years then ended, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 19, 1999, except Note 8 as to which the date is March 1, 1999
<PAGE> 17
CORPORATE INFORMATION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS BOARD OF TRUSTEES
- ---------------------------------------------------- --------------------------------------------------------------------
<S> <C> <C>
JEFFREY H. FISHER MILES BERGER C. GERALD GOLDSMITH
Chairman of the Board, Chief Executive Officer Chairman of the Board Chairman of the Board
and President Mid-Town Bank Corp. Property Corp. International
FREDERIC M. SHAW
Chief Operating Officer and Executive Vice President THOMAS J. CROCKER ROLF H. RUHFUS
Chairman of the Board Chairman
DAVID BULGER Crocker Realty Trust Summerfield Corporation
Chief Financial Officer and Treasurer
MARK A. MURPHY JACK P. DeBOER BRUCE ZENKEL
General Counsel and Secretary Chief Executive Officer Principal
Candelwood Motel Company, Inc. Zenkel Schoenfeld
GREGORY M. FAY
Vice President for Accounting
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SHAREHOLDER AND INVESTOR INFORMATION
Innkeepers USA Trust
306 Royal Poinciana Plaza
Palm Beach, Florida 33480
(561) 835-1800
(561) 835-0457 FAX
Web Site: www./inkeepersusa.com
E-mail: [email protected]
ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders will be held on
Wednesday, May 5, 1999 at 9:00 a.m. EDT at:
Courtyard by Marriott Fort Lauderdale
2440 West Cypress Creek Road
Fort Lauderdale, Florida 33309
INDEPENDENT PUBLIC ACCOUNTANTS
PricewaterhouseCoopers LLP
2001 Ross Avenue
Suite 1800
Dallas, TX 75201
TRANSFER AGENT, REGISTRAR AND
DRIP PLAN ADMINISTRATOR
Harris Trust and Savings Bank
311 West Monroe, 11th Floor
Chicago, Illinois 60690
(312) 461-6001
STOCK LISTING
Innkeepers USA Trust is traded on the New York Stock Exchange
under the symbol KPA. The number of shareholders on
March 17, 1999 was approximately 10,500.
Stock Price
<TABLE>
<CAPTION>
1998 High Low Dividend
- ---- ---- --- --------
<S> <C> <C> <C>
Fourth Quarter $11.81 $ 8.75 $0.28
Third Quarter 13.81 9.63 0.28
Second Quarter 16.44 12.44 0.28
First Quarter 16.38 14.50 0.28
1997
- ----
Fourth Quarter $17.500 $14.125 $0.26
Third Quarter 17.188 13.625 0.26
Second Quarter 15.000 12.875 0.25
First Quarter 15.500 13.000 0.25
1996
- ----
Fourth Quarter $13.875 $10.500 $0.225
Third Quarter 11.250 9.500 0.225
Second Quarter 10.250 9.000 0.225
First Quarter 10.250 8.875 0.225
1995
- ----
Fourth Quarter $ 9.625 $ 8.625 $0.215
Third Quarter 9.500 8.375 0.215
Second Quarter 9.125 8.000 0.215
First Quarter 8.625 7.125 0.194
1994
- ----
Fourth Quarter $ 9.750 $ 7.125 $0.194
Sept. 23 1994 to
Sept. 30 1994 10.125 9.625 --
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES
Innkeepers USA Trust, a Maryland real estate investment trust
(the "Company"), operates principally through two entities, (i) Innkeepers
Financial Corporation, a Virginia corporation ("IFC"), which is a wholly-owned
subsidiary of the Company, and (ii) Innkeepers USA Limited Partnership, a
Virginia limited partnership (the "Partnership"), of which IFC owns an
approximately 95.7% interest. All of the Company's hotels are owned by the
Partnership or subsidiary limited partnerships which are owned 99% by the
Partnership and 1% by either the Company directly or corporations which are
wholly-owned by the Company.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Innkeepers USA Trust on Form S-3 (File Nos. 33-97932, 333-20309, 333-31923,
333-37505, 333-53919, 333-53955, 333-58811 and 333-70873), of our reports (i)
dated February 19, 1999, except for Note 8 as to which the date is March 1,
1999, on our audits of the consolidated financial statements of Innkeepers USA
Trust as of December 31, 1998 and 1997, and for the years ended December 31,
1998, 1997 and 1996; (ii) dated February 19, 1999 on our audit of the financial
statement schedule of Innkeepers USA Trust as of December 31, 1998; and (iii)
dated March 19, 1999 on our audits of the combined financial statements of
Innkeepers Hospitality as of December 31, 1998 and 1997, and for the years ended
December 31, 1998, 1997 and 1996, which reports are included in, or incorporated
by reference, in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Dallas, Texas
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,535
<SECURITIES> 0
<RECEIVABLES> 10,699
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 764,221
<DEPRECIATION> 65,923
<TOTAL-ASSETS> 725,114
<CURRENT-LIABILITIES> 0
<BONDS> 191,183
0
115,750
<COMMON> 345
<OTHER-SE> 338,297
<TOTAL-LIABILITY-AND-EQUITY> 725,114
<SALES> 103,022
<TOTAL-REVENUES> 103,767
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,196
<INCOME-PRETAX> 42,113
<INCOME-TAX> 0
<INCOME-CONTINUING> 42,113
<DISCONTINUED> 0
<EXTRAORDINARY> (2,760)
<CHANGES> 0
<NET-INCOME> 33,164
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.80
</TABLE>
